Allstate v. Countrywide Complaint

145
Case 1:10-cv-09591-AKH Document 1-3 Filed 12/27/10 Page 1 of 145

description

Allstate lawsuit against Countrywide and Bank of America for fraud, negligent misrepresentation and Securities Act violations stemming from Countrywide's abandonment of underwriting guidelines and standards, and misrepresentation regarding same, related to mortgage backed securities bought by the insurer. Read analysis regarding this complaint and its importance at http://subprimeshakeout.blogspot.com/2010/12/mbia-sampling-order-signals-shorter.html.

Transcript of Allstate v. Countrywide Complaint

Page 1: Allstate v. Countrywide Complaint

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NATURE OF ACTION ...................................................................................................................1�

JURISDICTION AND VENUE ....................................................................................................12�

SUBSTANTIVE ALLEGATIONS ...............................................................................................13�

I.� ALLSTATE’S INVESTMENTS IN COUNTRYWIDE CERTIFICATES ......................13�

II.� COUNTRYWIDE’S MANDATE TO MATCH ANY PRODUCT ON THE MARKET REQUIRED IT TO SYSTEMATICALLY IGNORE ITS STATED UNDERWRITING PROCEDURES .................................................................................16�

A.� Countrywide Makes Origination Volume King .....................................................16�

B.� Countrywide Cedes its Underwriting Policy to the Market’s Lowest Common Denominator By Way of a “Matching” Mandate ..................................18�

C.� The “Matching” Policy Demanded the Systemic Abandonment of Countrywide’s Own Policies .................................................................................19�

D.� Securitization Allowed Countrywide to Transfer the Risks Created by Its Underwriting Abandonment to Investors Like Allstate .........................................22�

III.� COUNTRYWIDE’S MATERIAL MISREPRESENTATIONS .......................................25�

A.� General Underwriting Guidelines ..........................................................................25�

B.� Owner-Occupancy Statistics ..................................................................................26�

C.� Loan-to-Value Ratios and Appraisals ....................................................................26�

D.� Debt-to-Income ......................................................................................................28�

E.� No Adverse Interest in Selection ...........................................................................28�

F.� Ratings ...................................................................................................................29�

G.� Share of Mortgage Loans Granted Pursuant to Full-Documentation Procedures ..............................................................................................................30�

H.� Servicing Quality ...................................................................................................30�

I.� Case-by-Case Underwriting Exceptions ................................................................31�

IV.� ALL OF THE REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE COUNTRYWIDE SYSTEMATICALLY IGNORED ITS OWN UNDERWRITING GUIDELINES ....................................................................................31�

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A.� A Statistical Analysis of Allstate’s Certificates Shows That the Representations Were False ...................................................................................35�

(1)� The securities’ high default rates and souring credit ratings .....................35�

(2)� There are numerous indications that borrowers did not actually occupy the mortgaged properties as claimed .............................................38�

(3)� Re-calculating the loan-to-value ratios ......................................................41�

(4)� Statistical studies by others have similarly revealed that the problems in Countrywide-originated loans were tied to underwriting abandonment ........................................................................45�

(5)� Other parties’ reviews of Countrywide’s full loan files have revealed even greater deviations ................................................................46�

B.� Countrywide’s Own Internal Documents Demonstrate It Abandoned Its “Theoretical” Underwriting Standards ..................................................................49�

(2)� Countrywide’s internal post-mortem shows it systematically ignored the risks created by its “matching” strategy .................................50�

(3)� Mozilo’s emails show he “personally observed a serious lack of compliance” ...............................................................................................51�

(4)� Internal quality reviews highlight that loans were being issued outside of Countrywide’s underwriting guidelines ....................................53�

(5)� Exceptions were used as a way to deploy the “matching” strategy, despite Countrywide’s “theoretical” underwriting guidelines ...................57�

(6)� Countrywide admits to “cherry picking” deals ..........................................60�

(7)� In short, Countrywide “basically continued to operate as though they never received” risk policies. .............................................................60�

C.� The Sworn Testimony of Countrywide’s Own Former Officers Demonstrate That It Abandoned Its “Theoretical” Underwriting Standards .........62�

(1)� Chief Risk Officer John McMurray: “Matching policy” resulted in “routinely” using loan “exceptions” ..........................................................62�

(2)� Vice President of Credit Risk Management Christian Ingerslev: “Focus groups” confirmed borrowers were misrepresenting income ........65�

(3)� Managing Director Frank Aguilera: “Matching” strategy was “not a tolerable process” for subprime products ................................................66�

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(4)� CEO Angelo Mozilo: Matching strategy was a “dangerous game” .........66�

(5)� Depositor President Nathan Adler: “Salability” was the sole factor for giving “exceptions” ..............................................................................66�

D.� Other Statements Provided By Countrywide Employees and Customers Further Confirm Countrywide’s Abandonment of its Underwriting Standards ................................................................................................................67�

(1)� Former employees: Borrowers were coached on how to use no-doc loans to circumvent prior loan rejections ............................................67�

(2)� Former employee: Countrywide knew appraisals were being inflated .......................................................................................................70�

(3)� Borrowers: Countrywide falsified our records .........................................70�

(4)� Former employees: Countrywide steered borrowers to riskier (higher fee) products and heavily incentivized employees to do so ..........71�

E.� Other Evidence That the Representations Were False ...........................................73�

(1)� Appraisal company: Countrywide pressured companies to obtain inflated home values ..................................................................................73�

(2)� The ratings were a garbage-in, garbage out process further hindered by conflicts of interest and outdated models ...............................77�

(3)� Government investigations and other lawsuits ..........................................80�

(4)� Studies of the percent of loans approved on a fully-documented basis............................................................................................................83�

(5)� Servicing failures .......................................................................................83�

V.� COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE ..........................87�

VI.� ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES ...................................95�

VII.� OTHER MATTERS...........................................................................................................97�

A.� Defendants’ Liability as Control Persons ..............................................................97�

B.� Bank of America’s Liability as a Successor-in-Interest by De Facto Merger ..................................................................................................................110�

C.� Allstate’s 1933 Act Claims Have Been Tolled By Previously-Filed Class Action Complaints ...............................................................................................121�

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FIRST CAUSE OF ACTION ......................................................................................................124�

SECOND CAUSE OF ACTION .................................................................................................126�

THIRD CAUSE OF ACTION .....................................................................................................128�

FOURTH CAUSE OF ACTION .................................................................................................129�

FIFTH CAUSE OF ACTION ......................................................................................................130�

SIXTH CAUSE OF ACTION .....................................................................................................132�

SEVENTH CAUSE OF ACTION ...............................................................................................135�

EIGHTH CAUSE OF ACTION ..................................................................................................137�

NINTH CAUSE OF ACTION .....................................................................................................139�

PRAYER FOR RELIEF ..............................................................................................................139�

JURY TRIAL DEMANDED .......................................................................................................140�

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Plaintiffs Allstate Insurance Company, Allstate Life Insurance Company, Allstate Life

Insurance Company of New York, and American Heritage Life Insurance Company (collectively

“Allstate”), by and through their attorneys, bring this action against Countrywide Financial

Corporation (“Countrywide Financial”), Countrywide Home Loans, Inc. (“Countrywide Home

Loans”), Countrywide Capital Markets, LLC (“Countrywide Capital Markets”) formerly known

as Countrywide Capital Markets, Inc., Countrywide Securities Corporation (“Countrywide

Securities”); and CWALT, Inc. (“CWALT”), CWABS, Inc. (“CWABS”), CWHEQ, Inc.

(“CWHEQ”), and CWMBS, Inc. (“CWMBS”) (the “Depositors”) (all collectively,

“Countrywide” or “the Countrywide Defendants”); Angelo Mozilo, David Sambol, Eric Sieracki,

Ranjit Kripalani, Stanford Kurland, David A. Spector, N. Joshua Adler, and Jennifer Sandefur

(the “Officer Defendants”); and Defendants Bank of America Corporation (“Bank of America”),

BAC Home Loans Servicing, LP, and NB Holdings Corporation (together “the Bank of America

Defendants”), and allege as follows:

NATURE OF ACTION

1. This action arises out of Countrywide’s sale of certain residential mortgage-

backed securities (the “Certificates”) to Allstate. The Certificates were sold pursuant to

registration statements and prospectuses that contained untrue statements and omissions of

material facts, in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the

“1933 Act”); Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the “1934

Act”); and common-law fraud and negligent misrepresentation.

2. Beginning in 2003, Countrywide began systematically to ignore the underwriting

standards it touted. Countrywide was singularly focused on increasing its market share,

offloading the risk onto Allstate and other institutional investors that purchased securities backed

by pools of Countrywide’s mortgages. In pursuit of market share, unbeknownst to Allstate,

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Countrywide internally adopted a “matching” strategy that would approve any mortgage product

feature offered by a competitor. By mixing and matching the worst features of mortgage

products from different competitors, Countrywide’s composite product offering became very

aggressive within the industry.

3. This “matching” strategy could only be implemented through the substantial and

material abandonment of Countrywide’s claimed credit-risk-reducing underwriting procedures.

To get around these “theoretical” requirements, Countrywide set up a system whereby any loan

would be approved by way of underwriting “exceptions,” and coached borrowers on how to

apply for loan products that required little or no income or asset verification. This systemic

abandonment of Countrywide’s stated underwriting guidelines infected all of the loans it

securitized. Whereas Allstate was made to believe it was buying highly-rated, safe securities

backed by pools of loans with specifically-represented risk profiles, in fact the Defendants knew

the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not

afford the properties, and thus were highly likely to default.

4. Countrywide’s material misrepresentations and omissions regarding the riskiness

and credit quality of the Certificates in which Allstate invested, made through the registration

statements, prospectuses and prospectus supplements, term sheets, and other written materials

(the “Offering Materials”), are numerous. For example:

(i) Underwriting guidelines. The Offering Materials consistently represented

that Countrywide followed a conservative, reliable, reasonable underwriting process whose

purpose was to evaluate a borrower’s ability to repay their loan. Internal Countrywide materials

recently made available by the SEC, however, and other sources all confirm that Countrywide

“ceded” its standards to the lowest common denominator in the market. Countrywide

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undermined whatever “theoretical” remaining standards it even purported to follow internally by

way of, among other things, loan “exceptions,” low-documentation loan procedures, and simply

ignoring the rejection of deals by its own credit officers.

(ii) Owner Occupancy Statistics. The Offering Materials made specific

representations regarding the percentage of borrowers who would be occupying the property

being mortgaged – a key risk characteristic for Allstate given that borrowers are less likely to

walk away from the properties in which they live, as compared to second homes or investment

properties. Analytical tools recently made available confirm that in truth, a far greater

percentage of the loans underlying Allstate’s Certificates were in fact given to borrowers who

lived elsewhere, such as investors or people purchasing vacation homes.

(iii) Loan to Value Ratios and Independent Appraisals. The Offering

Materials represented that the loans had specific loan-to-value and combined loan-to-value

ratios. This is another key risk metric, because these statistics represent the equity “cushion” that

borrowers have, and the likelihood of repayment to lenders upon foreclosure. Countrywide

represented that these values were calculated using independent appraisers, when in fact it knew

they were derived from affiliates and other appraisers who knowingly inflated property values to

qualify borrowers for larger loans than they could truly afford. Analytical tools recently made

available confirm that the Offering Materials’ statistics vastly overstated the value of the

collateral being included in the loan pools.

(iv) Purpose and use of exceptions and low-documentation procedures. The

Offering Materials represented that “exceptions” to Countrywide’s underwriting guidelines were

given on the basis of countervailing features of the borrowers’ risk profiles that ‘made up’ for

negative aspects of the risk profile. Internal documents and testimony given in the SEC action

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that have recently been made available, however, confirm that “exceptions” were instead used

merely as a tool to circumvent the underwriting process and increase market share. Similarly,

though the Offering Materials represented that low-documentation loans were sometimes used,

they materially misstated the number of such loans that underlie the Certificates. Defendants

also hid from Allstate that these alternative-documentation procedures were being used as

another way to circumvent the underwriting guidelines. Countrywide would shift borrowers that

would otherwise be rejected into such programs, and then help them falsify their applications in

such a way as to ensure the borrower received approval for a loan.

5. Allstate purchased over $700 million in Countrywide mortgage-backed securities

(the “Certificates”) between March 2005 and June 2007 in reliance on these and the other

misrepresentations and omissions, as set forth below. The details of the securities at issue in this

action are set forth in Exhibit A. The exhibits attached to this Complaint are all incorporated as

if set forth fully herein.

6. The systemic abandonment of Countrywide’s stated underwriting practices has

predictably led to soaring default rates in the mortgage loans underlying Allstate’s Certificates

(the “Mortgage Loans”). For instance, despite the fact that the majority of Allstate’s Certificates

started out with AAA ratings – the same rating given to treasury bills backed by the full faith and

credit of the United States government – 93% of them are now not even considered to be

investment grade. These problems are so drastic and their onset was so rapid (in comparison to

the long-term security of the investments Allstate thought it was purchasing) that the

Certificates’ poor performance to date is itself powerful evidence that the Mortgage Loans were

not underwritten according to the procedures represented to Allstate. With the underlying loans

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performing so poorly, the market value of Allstate’s Certificates has plummeted, causing Allstate

to incur significant losses.

PARTIES

7. The Plaintiffs. Plaintiff Allstate Insurance Company is an insurance company

formed under the laws of, and domiciled in, the State of Illinois, with its principal place of

business in Northbrook, Illinois. It is the nation’s largest publicly held personal lines insurer

selling property and casualty insurance. Allstate Insurance Company is licensed to do business

in New York and writes insurance policies to New York residents. Allstate is a wholly-owned

subsidiary of Allstate Insurance Holdings, LLC, which is a Delaware limited liability company.

Allstate Insurance Holdings, LLC is a wholly-owned subsidiary of The Allstate Corporation,

which is a Delaware corporation.

8. Plaintiff Allstate Life Insurance Company is an insurance company formed under

the laws of, and domiciled in, the State of Illinois, with its principal place of business in

Northbrook, Illinois. It sells life insurance and annuity products. Allstate Life Insurance

Company is a wholly-owned subsidiary of Allstate Insurance Company.

9. Plaintiff Allstate Life Insurance Company of New York is an insurance company

formed under the laws of, and domiciled in, the State of New York, with its principal place of

business in Hauppauge, New York. Allstate Life Insurance Company is licensed to do business

in New York and writes insurance policies to New York residents. It sells life, accident and

health insurance and annuity products. Allstate Life Insurance Company of New York is a

wholly-owned subsidiary of Allstate Life Insurance Company.

10. Plaintiff American Heritage Life Insurance Company is an insurance company

formed under the laws of, and domiciled in, the State of Florida, with its principal place of

business in Jacksonville, Florida. It sells life, accident and health insurance and annuity

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products. American Heritage Life Insurance Company is a wholly-owned subsidiary of

American Heritage Life Investment Corporation, which is a Delaware corporation. American

Heritage Life Investment Corporation is a wholly-owned subsidiary of The Allstate Corporation.

11. The Countrywide Defendants. Defendant Countrywide Financial is a

corporation organized under the laws of the State of Delaware with its principal executive offices

at 4500 Park Granada, Calabasas, California. Pursuant to a merger completed on July 1, 2008,

Countrywide Financial has been merged into and is now part of Bank of America.

12. Defendant Countrywide Home Loans, a wholly-owned subsidiary of Countrywide

Financial, is a corporation organized under the laws of the State of New York with its principal

place of business at 4500 Park Granada, Calabasas, California. Countrywide Home Loans is

now part of Bank of America and operates under the trade name “Bank of America Home

Loans.”

13. Defendant Countrywide Capital Markets, a wholly-owned subsidiary of

Countrywide Financial, is a corporation organized under the laws of the State of California with

its principal place of business at 4500 Park Granada, Calabasas, California. Countrywide Capital

Markets (now part of Bank of America) operates through its two main wholly-owned

subsidiaries, Defendant Countrywide Securities Corporation and Countrywide Servicing

Exchange.

14. Defendant Countrywide Securities Corporation is a corporation organized under

the laws of the State of Delaware with its principal place of business at 4500 Park Granada,

Calabasas, California. Countrywide Securities is now part of Bank of America.

15. The Depositors. Defendant CWALT is a Delaware corporation and a limited

purpose subsidiary of Countrywide Financial Corporation with its principal place of business at

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4500 Park Granada, Calabasas, California. CWALT was the Depositor for certain of the

Offerings in which Allstate invested, the Registrant for certain Registration Statements filed with

the SEC, and an issuer of certain mortgage-backed Certificates purchased by Allstate.

16. Defendant CWABS is a Delaware corporation and a limited purpose subsidiary of

Countrywide Financial Corporation with its principal place of business at 4500 Park Granada,

Calabasas, California. CWABS was the Depositor for certain of the Offerings in which Allstate

invested, the Registrant for certain Registration Statements filed with the SEC, and an issuer of

certain mortgage-backed Certificates purchased by Allstate.

17. Defendant CWHEQ is a Delaware corporation and a limited purpose subsidiary of

Countrywide Financial Corporation with its principal place of business at 4500 Park Granada,

Calabasas, California. CWHEQ was the Depositor for certain of the Offerings in which Allstate

invested, the Registrant for certain Registration Statements filed with the SEC, and an issuer of

certain mortgage-backed Certificates purchased by Allstate.

18. Defendant CWMBS is a Delaware corporation and a limited purpose subsidiary

of Countrywide Financial Corporation with its principal place of business at 4500 Park Granada,

Calabasas, California. CWMBS was the Depositor for certain of the Offerings in which Allstate

invested, the Registrant for certain Registration Statements filed with the SEC, and an issuer of

certain mortgage-backed Certificates purchased by Allstate.

19. The Officer Countrywide Defendants. Defendant Angelo Mozilo is Countrywide

Financial’s co-founder and served on Countrywide Financial’s Board of Directors from 1969 to

July 1, 2008. Mozilo also served as Countrywide Financial’s Chairman of the Board starting in

March 1999 and in various other executive positions since Countrywide Financial’s inception,

including President from March 2000 through December 2003, and Chief Executive Officer

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from February 1998 to July 1, 2008. He was a member of Countrywide Financial’s Executive

Strategy Committee, which, from its creation in 2005, was responsible for establishing and

evaluating Countrywide’s overall strategic direction and governing its annual planning process.

Mozilo also served on Countrywide Financial’s Credit Committee and Finance Committee and,

as CEO and Chairman of the Board, directly oversaw the Ethics and Asset/Liability Committees.

Mozilo resigned from all of the above positions on July 1, 2008. Mozilo resides in Thousand

Oaks, California.

20. Defendant David Sambol joined Countrywide Financial in 1985. Sambol held

numerous key executive positions at Countrywide. From 1994 to 2003, Sambol was a Managing

Director and served as Countrywide Financial’s Senior Managing Director and Chief of

Production for its loan sector. From 2004 to 2006, Sambol was President and COO of

Countrywide Home Loans, where he led all operations and had oversight responsibility for the

company.

21. From 2004 to 2006, Sambol served as Countrywide Financial’s Executive

Managing Director for Business Segment Operations, heading up all revenue-generating

operations at Countrywide Financial, as well as the corporate operational and support units

comprised of Administration, Marketing and Corporate Communications, and Enterprise

Operations and Technology. From September 2006 through mid-2008, when he retired, Sambol

was Countrywide Financial’s President and Chief Operating Officer. Beginning in 2007, Sambol

was CEO of Countrywide Home Loans and a member of Countrywide Financial’s Board of

Directors. Beginning in 2007, Sambol also was CEO and President of CWHEQ and a member

of its Board of Directors. Sambol resides in Hidden Hills, California.

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22. During his tenure at Countrywide, Sambol was also a member of several

Countrywide Financial committees, including the (1) Executive Strategy Committee; (2)

Asset/Liability Committee; (3) Finance Committee; (4) Audit and Ethics Committee; and (5)

Committee to Set Loan Loss Allowance.

23. Defendant Eric Sieracki served as Countrywide Financial’s Executive Managing

Director and Chief Financial Officer from April 2005 through Countrywide’s merger with Bank

of America in 2008. Prior to his appointment as CFO, Sieracki occupied other high-level

positions within Countrywide, including with CWALT, CWABS, CWHEQ, and CWMBS.

Sieracki signed the Registration Statements for the following securitizations: CWALT 2006-

30T1, CWALT 2006-45T1, CWALT 2006-9T1, CWALT 2006-J1, CWALT 2007-18CB,

CWALT 2007-20, CWHEL 2005-B, CWHL 2005-HYB-7, CWHL 2006-9, CWL 2005-11, CWL

2005-13, CWL 2005-16, CWL 2005-17, CWL 2006-1, CWL 2006-9, CWL 2006-S1, CWL

2006-S2, CWL 2006-S5, CWL 2006-S8, CWL 2007-4, CWL 2007-S1, and CWL 2007-S2.

Sieracki resides in Lake Sherwood, California.

24. Defendant Ranjit Kripalani joined Countrywide Financial and its subsidiary

Countrywide Securities in 1998, as Countrywide Financial’s Executive Vice President, and

Countrywide Securities’ National Sales Manager. He served in numerous high-level positions

across Countrywide since, including with CWALT, CWABS, CWHEQ and CWMBS. Kripalani

signed the Registration Statements for the following securitizations: CWALT 2007-18CB and

CWALT 2007-20. Kripalani resides in Manhattan Beach, California.

25. Defendant Stanford Kurland was President and COO of Countrywide Financial

from 1988 until he ceased working for Countrywide Financial on September 7, 2006. He served

in numerous high-level positions across Countrywide. At all relevant times up to his 2006

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departure from Countrywide, Kurland was also the CEO, President and Chairman of the Board

of CWABS. He was also Chairman of the Board, President, and CEO of CWALT, CWABS,

CWHEQ, and CWMBS. Kurland signed the registration statements for the following

securitizations: CWALT 2005-25T1, CWALT 2006-30T1, CWALT 2006-45T1, CWALT 2006-

9T1, CWALT 2006-J1, CWHEL 2005-B, CWHL 2005-HYB7, CWHL 2006-9, CWL 2005-1,

CWL 2005-11, CWL 2005-13, CWL 2005-16, CWL 2005-17, CWL 2005-3 CWL 2006-1, CWL

2006-9, CWL 2006-S1, CWL 2006-S2, CWL 2006-S5, CWL 2006-S8, CWL 2007-4, CWL

2007-S1, and CWL 2007-S2. Kurland resides in Hidden Hills, California and is employed by

PennyMac, a mortgage company in Calabasas, California, that invests in distressed mortgages of

the type that Kurland helped originate as a Countrywide executive.

26. Defendant David A. Spector joined Countrywide in 1990 and served as its

Executive Vice President of Secondary Markets. He was subsequently promoted to Managing

Director in 2001 and served as Senior Managing Director of Secondary Marketing at

Countrywide Financial from 2004 to 2006. He was also a member of the Board of Directors for

CWALT, CWABS, CWHEQ, and CWMBS. Spector signed the Registration Statements for the

following securitizations: CWALT 2005-25T1, CWALT 2006-30T1, CWALT 2006-45T1,

CWALT 2006-9T1, CWALT 2006-J1, CWHEL 2005-B, CWHL 2005-HYB7, CWHL 2006-9,

CWL 2005-1, CWL 2005-11, CWL 2005-13, CWL 2005-16, CWL 2005-17, CWL 2005-3,

CWL 2006-1, CWL 2006-9, CWL 2006-S1, CWL 2006-S2, CWL 2006-S5, CWL 2006-S8,

CWL 2007-4, CWL 2007-S1, and CWL 2007-S2. Spector resides in Martinez, California. Like

Kurland, Spector is also employed by PennyMac.

27. Defendant N. Joshua Adler served as President, CEO, and was a member of the

Board of Directors for CWALT, CWABS, CWMBS, and CWHEQ. Adler signed the

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Registration Statements for the following securitizations: CWALT 2007-18CB and CWALT

2007-20. Adler resides in Calabasas, California.

28. Defendant Jennifer Sandefur joined Countrywide Financial in 1994 as Vice

President and Assistant Treasurer and was shortly thereafter promoted to Treasurer of

Countrywide Home Loans. She served as Senior Managing Director and Treasurer of

Countrywide Financial at the time of her departure in 2008. She also held high-level positions

with CWALT, CWABS, CWHEQ, and CWMBS. Sandefur signed the Registration Statement

for the CWALT 2007-18CB securitization. Sandefur resides in Somis, California.

29. The Bank of America Defendants. Defendant Bank of America Corporation is a

Delaware corporation with its principal executive offices at 100 North Tryon Street, Charlotte,

North Carolina. Defendants Countrywide Financial, Countrywide Home Loans, Countrywide

Capital Markets, and Countrywide Securities all became part of Bank of America following the

merger of Countrywide Financial into Bank of America on July 1, 2008.

30. Defendant BAC Home Loans Servicing, LP is a limited partnership and

subsidiary of Bank of America with its principal executive offices at 4500 Park Granada,

Calabasas, CA. BAC Home Loans Servicing, LP is identified in mortgage contracts and other

legal documents as “BAC Home Loans Servicing, LP FKA Countrywide Home Loans Servicing,

LP,” meaning it was formerly known as Countrywide Home Loans Servicing, LP, the

Countrywide subsidiary responsible for servicing Countrywide’s mortgage loans after they are

originated.

31. Defendant NB Holdings Corporation is a Delaware corporation. NB Holdings

Corporation is one of the shell entities used to effectuate the Bank of America-Countrywide

merger, and is a successor to Defendant Countrywide Home Loans. On July 3, 2008, Defendant

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CHL completed the sale of substantially all of its assets to NB Holdings Corporation, a wholly-

owned subsidiary of Bank of America.

32. Relevant Non-Parties. The Certificates for each securitization relevant to this

action were issued by a trust. The issuing trusts (collectively, the “Trusts”) are identified in

Exhibit A along with other details regarding Allstate’s purchases. The Trusts are common-law

trusts formed under the laws of the State of New York.

33. The Trusts are managed by a trustee. The trustee for Allstate’s Countrywide

Offerings was The Bank of New York, a New York banking corporation, for all Offerings except

for CWHEL 2005-B. The trustee for that Offering was Wilmington Trust Company, a Delaware

banking corporation.

34. At all relevant times, the Defendants committed the acts, caused or directed others

to commit the acts, or permitted others to commit the acts alleged in this Complaint. Any

allegations about acts of corporate Defendants means that those acts were committed through

their officers, directors, employees, agents, and/or representatives while those individuals were

acting within the actual or implied scope of their authority.

JURISDICTION AND VENUE

35. This Court has jurisdiction over the action pursuant to 28 U.S.C. § 1331. The

federal claims asserted herein arise under Section 10(b) of the Securities and Exchange Act of

1934 (the “1934 Act”), 15 U.S.C. § 78j(b); Rule 10b-5 promulgated thereunder, 17 C.F.R. §

240.10b-5; Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a); 28 U.S.C. § 1337; and Section 27

of the 1934 Act, 15 U.S.C. § 78aa. The federal claims asserted herein also arise under Sections

11, 12(a)(2), and 15 of the Securities Act of 1933 (the “1933 Act”), 15 U.S.C. §§ 77k, 77l(a)(2),

and 77o; Section 22 of the 1933 Act, 15 U.S.C. § 77v; and 28 U.S.C. § 1337.

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36. This Court has supplemental jurisdiction over Allstate’s state-law claims pursuant

to 28 U.S.C. § 1367.

37. Venue is proper in this District pursuant to 28 U.S.C. §1391(b) and Section 27 of

the 1934 Act, 15 U.S.C. § 78aa. Defendants can be found and transact business in this District

and many of the acts and practices giving rise to Allstate’s claims occurred in substantial part in

this District. Defendants are also subject to personal jurisdiction in this District.

SUBSTANTIVE ALLEGATIONS

I. ALLSTATE’S INVESTMENTS IN COUNTRYWIDE CERTIFICATES

38. Allstate made its Countrywide investments as part of a broader plan to invest in a

diverse array of mortgage-backed securities. Allstate typically purchased senior classes of

mortgage-backed securities (e.g. those rated AAA/Aaa or AA/Aa by the rating agencies Standard

& Poor’s and Moody’s Investors Service). Allstate purchased the Certificates from Countrywide

to generate income and total return through safe investments. But Allstate also purchased these

securities with the expectation that the investments could be—and indeed some would be—sold

on the secondary market.

39. Allstate made the following purchases of Countrywide Certificates, representing a

total investment of over $700 million. Exhibits A and B to this Complaint set forth information

about the Certificates and the Offerings in greater detail.

Asset Full Name of Offering Purchase

Price CWALT 2005-25T1 A6 Mortgage Pass-Through Certificates, Series

2005-25T1 5,148,437

CWALT 2005-25T1 A6 Mortgage Pass-Through Certificates, Series 2005-25T1

5,148,437

CWALT 2006-30T1 1A3

Mortgage Pass-Through Certificates, Series 2006-30T1

38,492,814

CWALT 2006-45T1 2A6

Mortgage Pass-Through Certificates, Series 2006-45T1

5,709,930

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CWALT 2006-9T1 A4 Mortgage Pass-Through Certificates, Series 2006-9T1

13,057,391

CWALT 2006-J1 1A6 Mortgage Pass-Through Certificates, Series 2006-J1

24,545,197

CWALT 2007-18CB 1A2

Mortgage Pass-Through Certificates, Series 2007-18CB

24,982,422

CWALT 2007-20 A1 Mortgage Pass-Through Certificates, Series 2007-20

22,000,000

CWALT 2007-20 A1 Mortgage Pass-Through Certificates, Series 2007-20

13,000,000

CWHEL 2005-B, 2A Revolving Home Equity Loan Asset Backed Notes, Series 2005-B

25,000,000

CWHL 2005-HYB7 3A2

Mortgage Pass-Through Certificates, Series 2005-HYB7

22,525,023

CWHL 2006-9 A10 Mortgage Pass-Through Certificates, Series 2006-9

34,765,770

CWHL 2006-9 A10 Mortgage Pass-Through Certificates, Series 2006-9

20,887,501

CWL 2005-1, MF2 Asset-Backed Certificates, Series 2005-1 2,699,893

CWL 2005-1, MF3 Asset-Backed Certificates, Series 2005-1 1,499,962

CWL 2005-1, MF4 Asset-Backed Certificates, Series 2005-1 1,999,916

CWL 2005-1, MF5 Asset-Backed Certificates, Series 2005-1 1,249,986

CWL 2005-11, AF5A Asset-Backed Certificates, Series 2005-11 11,999,332

CWL 2005-11, AF6 Asset-Backed Certificates, Series 2005-11 24,999,925

CWL 2005-13, AF5 Asset-Backed Certificates, Series 2005-13 9,999,433

CWL 2005-13, AF6 Asset-Backed Certificates, Series 2005-13 8,841,703

CWL 2005-13, AF6 Asset-Backed Certificates, Series 2005-13 4,999,770

CWL 2005-16 2AF2 Asset-Backed Certificates, Series 2005-16 9,999,947

CWL 2005-16 2AF5 Asset-Backed Certificates, Series 2005-16 19,998,986

CWL 2005-17, 1AF2 Asset-Backed Certificates, Series 2005-17 12,999,766

CWL 2005-17, 1AF5 Asset-Backed Certificates, Series 2005-17 4,999,896

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CWL 2005-17, 1AF5 Asset-Backed Certificates, Series 2005-17 12,060,058

CWL 2005-17, 1AF5 Asset-Backed Certificates, Series 2005-17 12,060,058

CWL 2005-3, MF2 Asset-Backed Certificates, Series 2005-3 8,499,866

CWL 2005-3, MF3 Asset-Backed Certificates, Series 2005-3 10,539,509

CWL 2005-3, MF4 Asset-Backed Certificates, Series 2005-3 4,589,945

CWL 2005-3, MF5 Asset-Backed Certificates, Series 2005-3 3,249,865

CWL 2006-1, AF5 Asset-Backed Certificates, Series 2006-1 9,999,873

CWL 2006-1, AF6 Asset-Backed Certificates, Series 2006-1 9,999,802

CWL 2006-9 1AF6 Asset-Backed Certificates, Series 2006-1 3,203,649

CWL 2006-9 1AF6 Asset-Backed Certificates, Series 2006-1 3,203,649

CWL 2006-9 1AF6 Asset-Backed Certificates, Series 2006-1 4,036,093

CWL 2006-S1, A2 Home Equity Loan Asset Backed Certificates, Series 2006-S1

11,199,824

CWL 2006-S1, A2 Home Equity Loan Asset Backed Certificates, Series 2006-S1

38,799,390

CWL 2006-S2, A2 Home Equity Loan Asset Backed Certificates, Series 2006-S2

19,999,824

CWL 2006-S5, A3 Home Equity Loan Asset Backed Certificates, Series 2006-S5

24,999,422

CWL 2006-S5, A4 Home Equity Loan Asset Backed Certificates, Series 2006-S5

9,999,795

CWL 2006-S8, A3 Home Equity Loan Asset Backed Certificates, Series 2006-S8

14,999,731

CWL 2006-S8, A6 Home Equity Loan Asset Backed Certificates, Series 2006-S8

7,499,840

CWL 2006-S8, A6 Home Equity Loan Asset Backed Certificates, Series 2006-S8

5,999,872

CWL 2007-4 M1 Asset-Backed Certificates, Series 2007-4 15,249,301

CWL 2007-4 M1 Asset-Backed Certificates, Series 2007-4 15,249,301

CWL 2007-4 M2 Asset-Backed Certificates, Series 2007-4 13,999,714

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CWL 2007-4 M2 Asset-Backed Certificates, Series 2007-4 13,999,714

CWL 2007-S1 A3 Home Equity Loan Asset Backed Certificates, Series 2007-S1

8,999,559

CWL 2007-S1 A3 Home Equity Loan Asset Backed Certificates, Series 2007-S1

8,999,559

CWL 2007-S1 A3 Home Equity Loan Asset Backed Certificates, Series 2007-S1

6,999,657

CWL 2007-S1 A4 Home Equity Loan Asset Backed Certificates, Series 2007-S1

6,999,510

CWL 2007-S1 A4 Home Equity Loan Asset Backed Certificates, Series 2007-S1

6,999,510

CWL 2007-S1 A4 Home Equity Loan Asset Backed Certificates, Series 2007-S1

5,999,580

CWL 2007-S1 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S1

8,999,896

CWL 2007-S1 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S1

8,999,896

CWL 2007-S1 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S1

6,999,919

CWL 2007-S2 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S2

9,999,371

CWL 2007-S2 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S2

8,499,465

CWL 2007-S2 A6 Home Equity Loan Asset Backed Certificates, Series 2007-S2

8,499,465

II. COUNTRYWIDE’S MANDATE TO MATCH ANY PRODUCT ON THE

MARKET REQUIRED IT TO SYSTEMATICALLY IGNORE ITS STATED UNDERWRITING PROCEDURES

A. Countrywide Makes Origination Volume King

40. Countrywide’s remarkable growth from 2003 to 2007 was fueled by its success in

the process of pooling residential mortgages, “securitizing” the pool by issuing securities backed

by it, then selling the securities to investors. The value and marketability of the securities was

dependent on the represented quality of the mortgages selected for the underlying pools.

41. During a conference call with analysts in 2003, Mozilo stated that his goal for

Countrywide Financial was to “dominate” the mortgage market and “to get our market share to

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the ultimate 30% by 2006, 2007.” Accomplishing Mozilo’s goal of a 30% market share required

Countrywide to systematically departing from its credit risk and underwriting standards.

42. This abandonment of Countrywide’s underwriting guidelines came under the

direction of Mozilo and Sambol, and was first put into action in a company-wide mandate by

Sambol. Around May 2003, Sambol became particularly close to Mozilo and emerged as a

major force within Countrywide Financial and Countrywide Home Loans, taking complete

charge of loan production in 2004. Countrywide’s senior management, particularly Sambol, who

ran Countrywide’s loan production machine as President and Chief Operating Officer of

Countrywide Home Loans, sent a clear message to loan origination and underwriting employees

that overall volume was far more important than creditworthiness.

43. Rather than relying on its underwriting standards to maintain Countrywide’s

profitability, Sambol argued that by originating and procuring a large volume of loans, regardless

of their relative risk, Countrywide would be able to cover any losses incurred by the riskier loans

by the profits it generated on other loans.

44. Mozilo’s 30% market share dictate resulted in a “culture change” starting in 2003.

A former senior regional vice president of Countrywide was quoted in Business Week as saying

that Countrywide “approached making loans like making widgets, focusing on cost to produce

and not risk or compliance. Programs like ‘Fast and Easy’ where the income and assets were

stated, not verified, were open to abuse and misuse. The fiduciary duty of making sure whether

the loan should truly be [extended] was not as important as getting the deal done.”

45. Countrywide’s senior management imposed intense pressure on underwriters to

approve mortgage loans, in some instances requiring underwriters to process 60 to 70 mortgage

loan applications in a single day and to justify any rejections they made. This created an

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incentive not to review loans thoroughly but instead simply to rubber-stamp them “approved.”

That pressure even came from the most senior levels of management—a former executive

reported that Sambol was “livid” at a 2005 meeting because call-center employees were not

selling enough adjustable-rate mortgages, which begin with “teaser” rates but quickly reset to

higher rates and thus are highly profitable for Countrywide.

B. Countrywide Cedes its Underwriting Policy to the Market’s Lowest Common Denominator By Way of a “Matching” Mandate

46. In order to meet its volume and market share goals, Countrywide abandoned any

semblance of underwriting standards. Unknown to Allstate, the only underwriting principles at

work within Countrywide were: (1) is another company doing it, and/or (2) can we sell it.

47. Countrywide had a policy of matching any product that a competitor was willing

to offer. A former finance executive at Countrywide explained that: “To the extent more than 5

percent of the [mortgage] market was originating a particular product, any new alternative

mortgage product, then Countrywide would originate it . . . . [I]t’s the proverbial race to the

bottom.”

48. Reuters reported that Mozilo saw the mortgage industry’s lending standards

“come unglued.” Yet Countrywide stuck to its “matching” strategy. Matching the most

aggressive mortgage products in an “unglued” industry would obviously make Countrywide

among the most aggressive. But this understates the severity of the impact Countrywide’s

“matching” strategy had. Countrywide would mix and match the terms offered by multiple

lenders. The resulting composite offering would be even more aggressive than any one

competitor who had a particular feature matched. Countrywide’s aggressive mortgage products

presented “layered” risks created by its undisclosed “matching” philosophy.

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49. To conceal its greatly increased production of subprime loans, Countrywide

employed an internal, undisclosed definition of prime versus subprime, and thus, in its public

reports, Countrywide Financial classified loans as “prime” that clearly were subprime under

well-established industry standards. A former senior underwriter at Countrywide reported that

Countrywide regularly classified loans as “prime” even if they were issued to non-prime

borrowers, including people who recently went through bankruptcy. According to the SEC,

Countrywide included in the prime category loans with FICO scores below 620, and further

included loan products with increasing amounts of credit risk such as reduced or no-

documentation loans and pay-option adjustable-rate mortgages (“ARMs”).

C. The “Matching” Policy Demanded the Systemic Abandonment of Countrywide’s Own Policies

50. Countrywide’s “matching” strategy in an “unglued” market required it to

systematically abandon its underwriting guidelines. It was impossible for its protocols to even

nominally keep up with the pace of change dictated by Countrywide’s “matching” strategy.

51. According to the SEC, Countrywide created an underwriting process that

incorporated at least four attempts to approve loans. First, loans were processed by an automated

system that would either approve the loan or refer it to manual underwriting. The manual

underwriter would then seek to determine if the loan could be approved under his or her

exception authority. If the loan exceeded the underwriter’s exception authority, it was then

referred to the Structured Lending Desk, where underwriters with broader exception authority

attempted to get the loan approved. Finally, if all prior attempts to find an “exception” failed, it

would be referred to the Secondary Markets Structured Lending Desk, where the sole criterion

for approving was whether it could be sold.

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52. One major way Countrywide deployed its “matching” strategy, despite its

“theoretical” underwriting policies, was to expand the number of employees who could grant

exceptions throughout this process. A wide range of employees received authority to grant

exceptions and to change the terms of a loan, including underwriters, their superiors, branch

managers, and regional vice presidents. Even if Countrywide’s computer system recommended

denying a loan, an underwriter could override that denial by obtaining permission from his or her

supervisor.

53. Countrywide routinely approved “exception” loans that did not satisfy even

Countrywide’s weakened “theoretical” underwriting criteria through a high-volume computer

system called the Exception Processing System (but only after Countrywide charged these high

risk borrowers extra points and fees). The Exception Processing System was known to approve

virtually every borrower and loan profile with a pricing add-on when necessary, and was

previously known within Countrywide as the “Price Any Loan” system. Indeed, Mozilo and

Sambol authorized the establishment of the exception-based Structured Loan Desk in Plano,

Texas, specifically to grant exceptions from the underwriting guidelines to which Countrywide

told the public it was adhering.

54. According to the SEC, Countrywide’s culture of “exceptions” started at the top,

with Mozilo personally approving loans by way of guideline exceptions pursuant to a “Friends of

Angelo” program.

55. Unknown to Allstate and contrary to Defendants’ representations, these

exceptions were not based on any countervailing compensating factors. Rather, they were given

merely to allow Countrywide to “match” what competitors were offering, and because

Countrywide believed the loans could be sold in the secondary market to investors like Allstate.

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56. According to the SEC, at one point, 23% of Countrywide’s subprime first-lien

loans were generated as “exceptions.” Similarly, according to the California Attorney

General’s complaint against Countrywide and Mozilo, a former supervising underwriter at

Countrywide stated that up to 15% or 20% of the loans that Countrywide generated were

processed via the Exception Processing System, of which very few were ever rejected. One

former Countrywide employee remarked that he could “count on one finger” the number of loans

that his supervisors permitted him to reject as an underwriter with Countrywide’s Structured

Loan Desks. All of these studies of Countrywide’s use of “exceptions” implicated

Countrywide’s practices at the same time that Allstate was originating the Mortgage Loans

underlying Allstate’s Certificates.

57. Another way Countrywide found to get around its “theoretical” underwriting

policies was the systematic abuse of no- and low-documentation loan processes. With these

products, the borrower is not required to provide the normal confirmations and details for credit

criteria such as annual income or current assets. Low-documentation mortgages were originally

designed for professionals and business owners with high credit scores, who preferred not to

disclose their confidential financial information. Traditionally, these loans generally also

required low loan-to-value ratios. Countrywide repeatedly represented that risky products such

as low-doc loans were adhering to these traditional applications by providing low-documentation

products only to the most sophisticated and creditworthy borrowers.

58. To the contrary, low-doc loans were instead used as a tool to get around

Countrywide’s “theoretical” underwriting standards. When a loan officer knew an application

would not be approved on the basis of the applicant’s actual financial condition, the officer often

steered applicants into low-documentation products. Once in those programs, Countrywide

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coached borrowers on how to falsify the application to ensure it would be approved, and in some

instances would even fill out the required misrepresentations without the borrower’s knowledge.

Countrywide’s abuse of these alternative-documentation procedures is directly relevant to

Allstate’s Certificates, which often included loans approved through these procedures—indeed,

as described further below, on information and belief the loan pools underlying Allstate’s

Certificates included even more alternative-documentation loans than Countrywide disclosed at

the time of purchase.

D. Securitization Allowed Countrywide to Transfer the Risks Created by Its Underwriting Abandonment to Investors Like Allstate

59. Countrywide was willing to let its “matching” policy trump sound underwriting

practices because it was routinely placing the resulting risk from its risky loans on investors like

Allstate. Countrywide aggressively securitized the risky mortgages it was issuing by aggregating

or pooling them, and then issuing and selling securities to the public that were backed by the

mortgage pools.

60. Specifically, as it relates to the Certificates purchased by Allstate, many of the

loans that Countrywide Home Loans originated in the relevant period were pooled together by

the Depositors, and deposited into special purpose entities or trusts created by Countrywide

through the Depositors. The Trusts in turn issued Certificates backed by the loans, which were

then sold by the Countrywide Securities and other underwriters to Allstate.

61. The cash flows from the pooled loans, in the form of payments of interest and

principal, were used to make payments on the Certificates. The purchase of each Certificate was

thus the purchase of a right to participate in the cash flows generated by the underlying pool.

62. In other words, the individual Countrywide Defendants’ roles were:

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a. Countrywide Home Loans acted as the sponsor of the Securitizations and

as one of the Sellers. It originated the Mortgage Loans that were pooled together in the

securitizations and then sold, transferred, or otherwise conveyed title to those loans to the

Depositor pursuant to Pooling and Servicing Agreements, which are governed by New York law.

b. Countrywide Securities was the Lead Manager of the underwriters for the

Offerings. In that role, it was responsible for underwriting and managing the Securitizations’

sale of certificates to Allstate and other investors, including screening the Mortgage Loans for

compliance with Countrywide’s underwriting guidelines.

c. CWABS, CWALT, CWMBS, and CWHEQ were the Depositors for the

Offerings. The Depositors are the issuers of the securities for purposes of the 1933 Act. The

Depositors purchased the Mortgage Loans from Countrywide Home Loans and one or more

other Sellers pursuant to the Pooling and Servicing Agreements, which are governed by New

York law. The Depositors then sold, transferred, or otherwise conveyed the Mortgage Loans to

the Trustee, Wilmington Trust Company (for the CWHEL 2005-B Offering) and The Bank of

New York (for all other Offerings), which held the Loans in the Trusts for the benefit of Allstate

and other Certificateholders. The Depositors then issued the Certificates, which represent

interests in the Mortgage Loans held by the Trusts, to Plaintiffs and other investors. The

Depositors and the Sellers and Underwriters marketed and sold the Certificates to investors such

as Allstate. The Certificates were sold in classes according to their expected credit ratings, and

were expected to provide interest on the income stream generated by the Mortgage Loans in the

collateral pools. The Depositors were established as limited-purpose finance subsidiaries of

Countrywide Financial.

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d. Defendant Countrywide Financial is the corporate parent of Countrywide

Home Loans, Countrywide Securities, and the Depositors. In that capacity, it directed and

controlled those Defendants’ activities related to the Securitizations. Countrywide Financial

and/or Countrywide Home Loans also guaranteed Countrywide Home Loans Servicing’s loan-

servicing activities when required by the owner of the Mortgage Loans.

63. The following chart summarizes the roles above using one of the Offerings in

which Allstate invested as an example:

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III. COUNTRYWIDE’S MATERIAL MISREPRESENTATIONS

64. As it is the stream of payments from borrowers that funds payments to investors,

if enough loans in the pool default, investors will not be paid the interest returns promised and

may even lose their principal. The market value for the Certificates also decreases as the

perceived risk of the underlying pool increases. As such, any representation bearing on the

riskiness of the underlying Mortgage Loans was material to investors, including Allstate.

A. General Underwriting Guidelines

65. The underwriting process used to form the pools of Mortgage Loans underlying

Allstate’s Certificates was material to Allstate because, as discussed above, the quality of loans

in the pool determines the risk of the Certificates backed by those loans. If a reasonable

underwriting process was not actually followed, the chances that the loans had riskier features

than what Countrywide claimed (whether due to error, borrower misrepresentation, or otherwise)

greatly increases. This makes the resulting loan pool much more risky. A systemic underwriting

failure decreases the reliability of all of the information investors have about the loans, and thus

greatly increases their perceived and actual risk, and greatly decreases their market value.

66. Countrywide represented it consistently followed a conservative, reliable,

reasonable underwriting program. For example, in the Offering Materials for CWALT 2006-

9T1, Countrywide represented that “All of the mortgage loans will have been originated or

acquired by Countrywide Home Loans in accordance with its credit, appraisal and underwriting

standards” and that “Countrywide Home Loans’ underwriting standards are applied by or on

behalf of Countrywide Home Loans to evaluate the prospective borrower’s credit standing and

repayment ability and the value and adequacy of the mortgaged property as collateral.”

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67. The Offering Materials for each of the securitizations at issue here had similar

representations. The specific representations at issue in the Offering Materials on which Allstate

relied are found in Exhibits F through DD.

B. Owner-Occupancy Statistics

68. Owner-occupancy statistics were material to Allstate and other investors because

high owner-occupancy rates should have made the Certificates safer investments than

Certificates backed by second homes or investment properties. Homeowners who reside in

mortgaged properties are less likely to default than owners who purchase homes as investments

or second homes and live elsewhere.

69. Each of the Offering Materials contained detailed statistics regarding the

Mortgage Loans in the collateral pool, including the reported owner-occupancy characteristics of

the Mortgage Loans. The statistics reported whether the borrowers intended to occupy the

properties as owners, or use the properties as investment properties or second homes. For

example, in the Offering Materials for CWALT 2006-9T1, Countrywide represented that among

the 779 initial Mortgage Loans in the offering, 679 of the Mortgage Loans (86% of the total)

were for primary residences, i.e. owner-occupied properties.

70. The Offering Materials for each of the securitizations at issue here had similar

representations and statistics. Examples of each can be found in Exhibits F through DD.

C. Loan-to-Value Ratios and Appraisals

71. The loan-to-value (“LTV”) ratio is the ratio of a Mortgage Loan’s original

principal balance to the appraised value of the mortgaged property. The related Combined LTV

(“CLTV”) takes into account other liens on the property. These ratios were material to Allstate

and other investors because higher ratios are correlated with a higher risk of default. A borrower

with a small equity position in a property has less to lose if he or she defaults on the loan. There

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is also a greater likelihood that a foreclosure will result in a loss for the lender if the borrower

fully leveraged the property. These are common metrics for analysts and investors to evaluate

the price and risk of mortgage-backed securities.

72. For example, in the CWABS 2007-04 transaction, Countrywide represented that

the weighted average LTV ratio was 77.0%. Allstate’s subsequent loan-level analysis, described

further below, has subsequently determined that the weighted average LTV for this portfolio was

actually 87.0%.

73. The Offering Materials provided in connection with the Offerings also

represented that one or more independent appraisals were obtained for nearly every Mortgage

Loan. For example, in the Offering Documents for CWALT 2006-9T1, Countrywide

represented as follows:

Except with respect to mortgage loans originated pursuant to its Streamlined Documentation Program, Countrywide Home Loans obtains appraisals from independent appraisers or appraisal services for properties that are to secure mortgage loans. Appraisers inspect and appraise the proposed mortgaged property and verify that the property is in acceptable condition. Following each appraisal, the appraiser prepares a report which includes a market data analysis based on recent sales of comparable homes in the area and, when deemed appropriate, a replacement cost analysis based on the current cost of constructing a similar home. All appraisals are required to conform to Fannie Mae or Freddie Mac appraisal standards then in effect.

74. These representations regarding independence were material to Allstate and other

investors because they signaled the reliability of the LTV ratios discussed above.

75. The Offering Materials for each of the securitizations at issue here had similar

representations. Examples of each can be found in Exhibits F through DD.

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D. Debt-to-Income

76. The ratio of a borrower’s debt to his or her income was material to Allstate and

other investors because it represents a borrower’s ability to afford the mortgage payments at

issue, and thus implicates the likelihood of default.

77. In the Offering Documents for the CWABS 2007-04 Offering, for example,

Countrywide represented that “After obtaining all applicable employment, credit and property

information, Countrywide Home Loans uses a debt-to-income ratio to assist in determining

whether the prospective borrower has sufficient monthly income available to support the

payments of principal and interest on the mortgage loan in addition to other monthly credit

obligations.” Countrywide stated that “The maximum monthly debt-to-income ratio varies

depending upon a borrower’s credit grade and documentation level . . . but does not generally

exceed 55%.”

78. The Offering Materials for each of the securitizations at issue here often had

similar representations. Examples of each can be found in Exhibits F through DD.

E. No Adverse Interest in Selection

79. Whether or not Countrywide was “cherry picking” the higher-quality loans for

itself and leaving behind a poorer-quality pool for offloading onto investors was material to

Allstate and other investors because such a process would flag to investors the poor quality of the

loans actually being securitized, regardless of the general underwriting processes that

Countrywide supposedly followed.

80. For example, in the CWALT 2007-20 Offering Documents, Countrywide

represented that “the mortgage loans were selected from among the outstanding one- to four-

family mortgage loans in Countrywide Home Loans’ portfolio as to which the representations

and warranties set forth in the pooling and servicing agreement can be made and that the

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selection was not made in a manner intended to affect the interests of the certificateholders

adversely.”

81. The Offering Materials for each of the securitizations at issue here had similar

representations. Examples of each can be found in Exhibits F through DD.

F. Ratings

82. Each of the Certificates purchased by Allstate received a rating purportedly

indicating the rating agencies’ view of the risk profile of the securities. The initial and current

ratings given to the Certificate are contained in Exhibit C. The ratings were material to

reasonable investors, including Allstate, because the ratings were important to investors in

making their investment decisions. The securities would have been unmarketable and would not

have been issued but for the provision of these ratings.

83. The Offering Materials represented that the rating agencies conducted an analysis

that was designed to assess the likelihood of delinquencies and defaults in the underlying

mortgage pools. For example, the Offering Materials for CWL 2005-1 stated that “It is a

condition to the issuance of the securities of each series offered hereby and by the prospectus

supplement that they shall have been rated in one of the four highest rating categories by the

nationally recognized statistical rating agency or agencies (each, a “Rating Agency’’) specified

in the related prospectus supplement. Any such rating would be based on, among other things,

the adequacy of the value of the Trust Fund Assets and any credit enhancement with respect to

such class and will reflect such Rating Agency’s assessment solely of the likelihood that holders

of a class of securities of such class will receive payments to which such securityholders are

entitled under the related Agreement.”

84. The Offering Materials for each of the securitizations at issue here had similar

representations. Examples of each can be found in Exhibits F through DD.

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G. Share of Mortgage Loans Granted Pursuant to Full-Documentation Procedures

85. Whether the information in a loan file was fully documented, or whether it was

instead approved pursuant to a reduced or no-documentation procedure, was material to Allstate.

Reduced-documentation loans are riskier because the borrower provides less substantiating

information for items such as his or her income and assets. With less confirmation, it is more

likely that there are errors or misrepresentations in the loan file.

86. For example, in the CWL 2007-4 Offering, the prospectus supplement represented

that 71.8% of the Mortgage Loans were issued according to Full Documentation procedures, but

28.2% were issued according to Stated Income procedures.

87. The Offering Materials for each of the securitizations at issue here had similar

representations. Examples of each can be found in Exhibits F through DD.

H. Servicing Quality

88. How the loans were to be serviced after origination was material to Allstate and

other investors because a failure to properly service loans can significantly increase the number

of troubled loans that default rather than being brought back into compliance.

89. For example, in the CWALT 2007-20 Offering Documents, Countrywide

represented that “The master servicer [Countrywide Home Loans Servicing LP] will master

service all of the mortgage loans in accordance with the terms set forth in the pooling and

servicing agreement. The master servicer has agreed to service and administer the mortgage

loans in accordance with customary and usual standards of practice of prudent mortgage loan

lenders.”

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90. The Offering Materials for each of the securitizations at issue here had similar

representations about Countrywide Home Loans Servicing. Examples of each can be found in

Exhibits F through DD.

I. Case-by-Case Underwriting Exceptions

91. Whether Countrywide was making case-by-case exceptions was material to

Allstate and other investors because Countrywide’s claimed underwriting standards would be

made irrelevant if large portions of the loans were systemically excused from those standards.

92. Countrywide represented that it made case-by-case exceptions to its underwriting

standards, based on compensating factors that increased the quality of a loan application. For

example, in the Offering Materials for CWALT 2006-9T1, Countrywide represented that

“Exceptions to Countrywide Home Loans’ underwriting guidelines may be made if

compensating factors are demonstrated by a prospective borrower.”

93. The Offering Materials for each of the securitizations at issue here had similar

representations. Examples of each can be found in Exhibits F through DD.

IV. ALL OF THE REPRESENTATIONS WERE UNTRUE AND MISLEADING BECAUSE COUNTRYWIDE SYSTEMATICALLY IGNORED ITS OWN UNDERWRITING GUIDELINES

94. Instead of focusing on assessing an applicant’s credit standing and repayment

ability, Countrywide subordinated its underwriting standards to the goal of originating and

securitizing as many loans as it could to expand its market share and generate fees in the

secondary mortgage market. The systematic abandonment of any underwriting standards

rendered all of the above representations false or misleading at the time they were made.

95. The representations regarding Countrywide’s underwriting processes,

underwriting quality, loan selection, and use of exceptions were untrue. Countrywide

systematically abandoned its underwriting standards to increase loan volumes without regard to

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loan quality, “cherry picked” loans for itself, and offloaded the risky remaining pool of loans

onto Allstate and other institutional investors. Countrywide systematically ignored borrowers’

actual repayment ability and the value and adequacy of mortgaged property used as collateral in

issuing loans. Exceptions were granted abundantly and without consideration of any

compensating factors in order to grow market share pursuant to its “matching” corporate

strategy. The Defendants also misleadingly omitted that Countrywide was systematically

abusing “exceptions” and low-documentation loans in order to further circumvent its purported

underwriting standards, that it had adopted a “matching” strategy that ensured that its loan

offerings (a composite of the most aggressive features from every other lender) were at the

“frontier” of the industry, that “salability” was in essence the only underwriting principle, and

that Countrywide was further concealing the true quality of its practices by using a misleading

and self-serving definition of “prime.”

96. The representations regarding owner-occupancy and debt-to-income were untrue.

Countrywide’s abandonment of its underwriting practices and coaching of borrowers regarding

how to game the system facilitated the widespread falsification of these statistics. In reality, a far

greater percentage of properties were not owner-occupied, and borrowers’ claimed income was

regularly inflated. Countrywide also failed to disclose that the disclosed statistics were baseless.

97. The representations regarding loan-to-value, combined loan-to-value, and

appraisal independence were untrue. Countrywide did not genuinely believe the appraisal values

given to the properties because it knew that the property values were being artificially and

baselessly inflated in order to increase the amount of money that it could loan to a borrower,

rendering the LTV and CLTV statistics false and misleading. The statistics also omitted the

effect of additional liens on the property, making the CLTVs even further from the truth. In

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addition, contrary to its representations, Countrywide used affiliated rather than independent

appraisers. The Defendants also misleadingly omitted that the disclosed statistics were baseless

and that Countrywide was pressuring appraisers to inflate their appraisals.

98. The representations regarding the credit ratings were also untrue. Countrywide

fed baseless loan statistics to the credit rating agencies, essentially pre-determining the ratings

that would be given. The use of baseless statistics also made representations about the ratings

process being designed to assess credit risk false, as the entire ratings process was rigged from

the start through the use of incorrect data. Countrywide thus did not genuinely believe that the

Certificates’ ratings reflected their actual risk. Countrywide also failed to disclose that the

ratings were baseless, and were issued by rating agencies that were virulently conflicted and

were using outdated models.

99. The representations regarding servicing quality were untrue. As the Master

Servicer on the Offerings, the servicing performed by Countrywide Home Loans Servicing (or in

the case of CWHEL 2005-B, Countrywide Home Loans) lagged behind the standards of the

industry. Countrywide failed to allocate sufficient resources to service and administer the loans,

such as personnel to address customer inquiries and to conduct follow-up efforts with delinquent

borrowers. Countrywide also provided inadequate resources for work-out plans. These failures

were exacerbated by Countrywide’s break-neck origination of loans in disregard of its own

underwriting guidelines, which led to an extraordinary increase in delinquencies, defaults,

foreclosures, bankruptcies, litigation, and other proceedings. The Offering Materials

misrepresented these practices or failed to disclose them in the Certificates’ Offering Documents.

100. As described below, the evidence that these representations were untrue is

overwhelming. As the evidence shows, Countrywide’s abandonment was systemic. The

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evidence is directly relevant here, even if a particular e-mail does not refer on its face

specifically to Allstate’s Certificates. The subprime mortgage loans discussed in the materials

discussed below are the very same types of loans that backed some of Allstate’s Certificates, and

thus the materials are even more directly relevant to the collateral pools in this case.

101. In June 2009, the SEC initiated a civil action against Mozilo, Sambol, and

Sieracki. On September 16, 2010, the District Court denied the defendants’ motions for

summary judgment. Relying on just a small part of the evidence referred to below, the District

Court found that the SEC raised genuine issues of fact as to, among other things, whether the

defendants had misrepresented the quality of its underwriting processes:

The SEC has presented evidence that these statements regarding the quality of Countrywide’s underwriting guidelines and loan production were misleading in light of Defendants’ failure to disclose, inter alia, that: (1) As a consequence of Countrywide’s “matching strategy,” Countrywide’s underwriting “guidelines” would end up as a composite of the most aggressive guidelines in the market . . . and (2) Countrywide routinely ignored its official underwriting guidelines, and in practice, Countrywide’s only criterion for approving a loan was whether the loan could be sold into the secondary market.

For example, Countrywide’s Chief Risk Officer, John McMurray, explained in his deposition that Countrywide mixed and matched guidelines from various lenders in the industry, which resulted in Countrywide’s guidelines being a composite of the most aggressive guidelines in the industry . . . .

SEC has also presented evidence that Countrywide routinely ignored its official underwriting to such an extent that Countrywide would underwrite any loan it could sell into the secondary mortgage market. According to the evidence presented by the SEC, Countrywide typically made four attempts to approve a loan . . . . According to the testimony of the Managing Director of Countrywide Home Loans’ Secondary Marketing Division, once the loan was referred to Countrywide’s Secondary Markets Structured Lending Desk, the sole criterion used for approving the loan was whether or not the loan could be sold in the secondary market. As a result of this process, a significant portion (typically in excess of 20%) of Countrywide’s loans were issued as exceptions to its official underwriting guidelines . . . .

In light of this evidence, a reasonable jury could conclude that Countrywide all but abandoned managing credit risk through its underwriting guidelines . . . .

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S.E.C. v. Mozilo, No. CV 09-3994, 2010 WL 3656068, at *10 (C.D. Cal. Sept. 16, 2010)

(emphasis added). The Court also found that the SEC presented evidence from which a jury

could find Countrywide’s statistics regarding “prime” mortgages to be misleading, based on

Countrywide’s internal definition of that term. Id. at *14-15. Mozilo, Sambol, and the third

defendant, Eric Sieracki, subsequently settled with SEC on the eve of trial, agreeing to pay

substantial fines.

A. A Statistical Analysis of Allstate’s Certificates Shows That the Representations Were False

(1) The securities’ high default rates and souring credit ratings

102. Even though the Certificates were supposed to be long-term, stable investments,

just years after their issuance the underlying Mortgage Loans have already shown serious

deterioration in performance. For instance, fourteen of Allstate’s Offerings have had more than

30% of their Mortgage Loans either default already, or are currently in delinquency. Many are

even higher – for instance over 62% of the Mortgage Loans in the current pool are delinquent

for CWABS 2005-01 and CWABS 2005-13. Likewise, 60% or nearly 60% of the Mortgage

Loans in the current pool are delinquent for CWABS 2005-03, CWABS 2005-11, CWABS

2005-16, CWABS 2005-17, and CWABS 2006-01, CWABS 2006-09, and CWABS 2007-04.

These statistics are more fully set forth in Exhibit D, attached.

103. Many of Allstate’s Certificates have experienced high level of defaults.

104. The latest available information shows that in total, 49% of the original loans

underlying CWABS 2005-13 are delinquent or written off; 49% of the original loans underlying

CWABS 2006-9 are either delinquent or written off; and 40% of the original loans underlying

CWABS 2005-13 are either delinquent or written off.

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105. An analysis of the percent of loans currently in the loan pool at any given time

(i.e., that had not been removed already by way of default, foreclosure, prepayments, or

otherwise), and that were at least 30 days delinquent in their payments at as of certain periods in

the Offerings’ history, are set forth in Exhibit D.

106. Relatedly, the ratings given to the Certificates have significantly deteriorated.

Most of Allstate’s investments initially received the highest possible ratings – S&P’s AAA rating

or their equivalent from the other rating agencies. According to S&P’s website, “An obligation

rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to

meet its financial commitment on the obligation is extremely strong.” Moody’s similarly

describes its highest rating, Aaa, as meaning that the investment is “judged to be of the highest

quality, with minimal credit risk.” This is the same rating typically given to bonds backed by the

full faith and credit of the United States government, such as treasury bills. Historically, a AAA

rated security had an expected loss rate of less than .05%.

107. Because of the high delinquency and default rates and other factors, most of

Allstate’s Certificates have been downgraded from the highest possible ratings to junk-bond

ratings. Despite nearly all beginning with the same rating given to treasury bills (i.e., AAA),

currently 93% of the Certificates are currently rated as non-investment grade. Indeed, over

70% have fallen to “junk-bond” ratings—S&P’s rating of CCC (or the other rating agencies’

equivalent) or below. These statistics are reflected in Exhibit E. According to S&P’s website,

far from having the “extremely strong capacity” to meet commitments that AAA ratings do,

instead these ratings now indicate that the Certificates are “currently vulnerable and dependent

on favorable business, financial and economic conditions to meet financial commitments.”

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108. The Certificates were supposed to be long-term, stable investments, yet they have

already experienced payment problems significantly beyond what was expected for loan pools

that were properly underwritten and which contained loans that actually had the characteristics

the Offering Materials claimed. Countrywide’s risk officers have acknowledged that it is usually

a large and unexpected disruption to a borrower’s income that causes an actual payment default.

In a properly underwritten pool of loans, one would thus not expect to see a large spike of

defaults occurring shortly after origination, since it is unlikely that many borrowers would all

incur a sudden and unexpected change to their payment ability so soon after purchasing a home.

109. Indeed, as discussed further below in section IV(A), economic studies have

confirmed that high default rates early in a loan’s life are highly correlated with

misrepresentations in the loan files. This makes sense—as borrowers are put in loan products

they cannot actually afford, they quickly and predictably fall behind on their payments. Thus,

the dismal performance of the Mortgage Loans is itself strong evidence that they were

improperly written, and that they did not have the credit risk characteristics the Offering

Materials claimed.

110. The drastic rise in default rates on the Mortgage Loans underlying Allstate’s

Certificates, as reflected in Exhibit D, reflects Countrywide’s faulty underwriting rather than the

downturn in the housing market. Among all of the deals that Allstate invested in, the rate of

delinquency on the Mortgage Loans is far out of proportion to rates of delinquency in the market

as a whole, and the higher rate is directly attributable to Countrywide’s wrongdoing.

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(2) There are numerous indications that borrowers did not actually occupy the mortgaged properties as claimed

111. As above, Countrywide repeatedly represented that the loan pools underlying the

Certificates had high percentages of loans issued to borrowers that were living in the mortgaged

properties.

112. Allstate selected a random sample of loans from each offering in which it invested

to test Countrywide’s representations on a loan-level basis. Allstate conducted loan-level

analyses on nearly 19,000 Mortgage Loans underlying its Certificates, across a total of 14

Offerings.

113. Allstate analyzed data from one Offering corresponding to each of the

Registration Statements for its Offerings, to obtain a representative sampling of the Mortgage

Loans across all of Allstate’s investments. For each of these Offerings, Allstate analyzed 800

defaulted loans and 800 randomly-sampled loans from within the collateral pool. In some cases,

less than 1600 loans were available to be analyzed. For example, in the case of CWALT 2007-

20, Allstate analyzed data for each of the 933 Mortgage Loans in the original collateral pool.

114. For certain Offerings, the 1600 loans addressed essentially the entire loan pool.

For instance, Allstate analyzed 1,600 loans in CWL 2006-9 1AF6; there were 1,833 loans in the

original collateral pool. With CWHL 2005-HYB7 3A2, Allstate analyzed 1,600 of 1,951 loans.

115. Allstate’s sample sizes of Mortgage Loans are more than sufficient to provide

statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage

Loans’ characteristics. Analyzing data for each Mortgage Loan in each Offering would have

been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of

establishing reliable conclusions about broader data sets, and is routinely used by courts,

government agencies, and private businesses. As the size of a sample increases, the reliability of

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its estimations of the total population increase as well. Experts in RMBS cases have found that a

sample size of just 400 loans can provide statistically significant data, regardless of the size of

the actual loan pool, because it is unlikely that so large a sample would yield results vastly

different from results for the entire population.

116. To determine whether a given borrower actually occupied the property as

claimed, Allstate investigated tax information for the sampled loans. One would expect that a

borrower residing at a property would have the tax bills sent to that address, and would take all

applicable tax exemptions available to residents of that property. If a borrower had his or her tax

records sent to another address, that is good evidence that that borrower was not actually residing

at the mortgaged property. If a borrower declined to make certain tax exemption elections that

depend on the borrower living at the property, that also is strong evidence the borrower was

living elsewhere.

117. A review of credit records was also conducted. One would expect that people

have bills sent to their primary address. If a borrower was telling creditors to send bills to

another address, even six months after buying the property, it is good evidence the borrower was

living elsewhere.

118. A review of property records was also conducted. It is less likely that a borrower

lives in any one property if in fact that borrower owns multiple properties. It is even less likely

the borrower resides at the mortgaged property if a concurrently-owned separate property did not

have its own tax bills sent to the property included in the mortgage pool.

119. A review of other lien records was also conducted. If the property was subject to

additional liens but those materials were sent elsewhere, that is good evidence the borrower was

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not living at the mortgaged property. If the other lien involved a conflicting declaration of

residency, that too would be good evidence that the borrower did not live in the subject property.

120. The results of Allstate’s loan-level analysis of true owner-occupancy rates on the

Mortgage Loans underlying its Certificates are set forth below. Failing multiple of the above

tests is strong evidence the borrower did not in fact reside at the mortgaged properties. These

statistics thus show that, despite Countrywide’s representations, a much higher percentage of

borrowers did not occupy the mortgaged properties:

Asset

Percentage of Owner-Occupied Properties

Represented in Prospectus

Actual Percentage of Owner-Occupied

PropertiesProspectus

OverstatementCWL 2005-1, MF2

�����87.8% �����

CWALT 2005-25T1 A6 86.8% 73.6% ���

CWL 2005-13, AF5 96.4% 85.8% �����

CWALT 2006-J1 1A6 78.5% 72.6% ����

CWL 2006-S1, A2 91.0% 82.4% ���

CWL (CWABS) 2006-9 1AF6 95.1% 89.6% ����

CWALT 2006-30T1 1A3 88.6% 74.1% �����

CWHL (CWMBS) 2006-9 A10 91.7% 81.7% �����

CWL 2006-S5, A3 94.2% 85.8% ���

CWL 2007-S1 A3 93.7% 82.6% �����

CWL 2007-4 M1 96.9% 87.6% ���

CWALT 2007-20 A1 95.9% 84.7% ����

CWALT 2007-18C 3FL3 82.4% 71.4% �����

CWHL 2005-HYB7 3A2 79.0% 70.3% � �

121. The other Offerings in which Allstate invested made similar representations

regarding the percentage of owner-occupied properties among the Mortgage Loans. The

percentages above for actual owner-occupied properties, which are drawn from the nearly 19,000

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sample loans that Allstate analyzed, and the degree of overstatement in Countrywide’s

prospectuses, holds true for the other 15 Offerings in which Allstate invested that were not

subjected to loan-level analysis. The other Offerings emanate from common registration

statements, share similar Mortgage Loans as collateral, and were purchased by Allstate at the

same time as Allstate was purchasing the securities that were analyzed.

(3) Re-calculating the loan-to-value ratios

122. For each of the sampled loans, the underlying property was valued by an industry-

standard automated valuation model (“AVM”). AVMs are routinely used in the industry as a

way of valuing properties during prequalification, origination, portfolio review and servicing.

AVMs have become ubiquitous enough that their testing and use is specifically outlined in

regulatory guidance and discussed in the Dodd-Frank Act. AVMs rely upon similar data as

appraisers—primarily county assessor records, tax rolls, and data on comparable properties.

AVMs produce independent, statistically-derived valuation estimates by applying modeling

techniques to this data. The AVM that Allstate used incorporates a database of 500 million

mortgage transactions covering ZIP codes that represent more than 97% of the homes, occupied

by more than 99% of the population, in the United States. Independent testing services have

determined that this AVM is the most accurate of all such models.

123. Applying the AVM to the available data for the loans underlying the Certificates

shows that the appraised value given to the properties was significantly higher than what that

property was actually worth. This affected the LTV ratios by decreasing the actual value of the

properties relative to the loan amount, which increased the overall ratio. Overall, 18.3% of the

loans sampled had recalculated LTV ratios of more than 10% higher than what was claimed in

the Offering Materials, and 6.0% of the loans sampled had recalculated LTV ratios of more than

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25% higher than what was claimed in the Offering Materials. This overvaluation affected

numerous statistics in the Offering Materials.

124. For instance, the Offerings each made representations about the percent of loans

that had LTVs higher than 90%. LTVs in excess of 90% provide the lender little value cushion

to protect against borrower default and loss upon foreclosure. However, the AVM indicates that

a much higher percentage of the loans had LTVs higher than 90%. The LTV ratios were

understated by Countrywide, as shown in the chart below:

Asset

����������� ���������� ������������������������������������������

����� ����������� ���������� ����������������

����������!"�������#���

CWL 2005-1, MF2 ���� ���� ����CWALT 2005-25T1 A6 ���� ����� �����CWL 2005-13, AF5

��� ���� �����CWALT 2006-J1 1A6 ���� � � ����CWL 2006-9 1AF6 (CWABS) ���� ��� �����CWALT 2006-30T1 1A3 ��� ���� �����CWHL 2006-9 A10 (CWMBS) ���� ���� �����CWL 2007-4 M1 ���� ���� �����CWALT 2007-18C 3FL3 ��� ��� ����CWHL 2005-HYB7 3A2 ��� ���� �����

125. The Offerings uniformly represented that none of the Mortgage Loans that

collateralized the Certificates had LTV ratios greater than 100 percent, meaning the size of the

loan is greater than the value of the property. (This is known as being “underwater,” where a

borrower owes more on the property than it is worth.) Loans with over 100% LTV afford the

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43

lender no equity cushion and leave the lender with inadequate collateral from the outset of the

loan. Allstate’s analysis has found that, despite Countrywide’s representations, a substantial

number of the Mortgage Loans had LTVs greater than 100%, as follows:

Asset

����������� ���������� ����$��������������������������������������

����� ����������� ���������� ����$������������

����������!"�������#���

CWL 2005-1, MF2 ���� ���� ����CWALT 2005-25T1 A6 ���� ���� ����CWL 2005-13, AF5

���� ����� �����CWALT 2006-J1 1A6 ���� �� ��CWL 2006-9 1AF6 (CWABS) ���� �� � �� �CWALT 2006-30T1 1A3 ���� ����� �����CWHL 2006-9 A10 (CWMBS) ���� ���� ����CWL 2007-4 M1 ���� ��� ���CWALT 2007-20 A1

���� ���� ����CWALT 2007-18C 3FL3 ���� ����� �����CWHL 2005-HYB7 3A2 ���� ��� ���

126. Allstate has also analyzed the weighted average LTV of the Mortgage Loans in

each pool and has found that the weighted average LTV was also overstated, because of the

overstatement of individual Mortgage Loans within the pools. The AVM again indicates that

these representations were untrue:

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Asset

��������"���� ������������������%������&���

����� ��������"���� ��

%������&���'�!"�������#���

CWL 2005-1, MF2 ���� ��� ����CWALT 2005-25T1 A6 ���� ���� � �CWL 2005-13, AF5

����� ��� ���CWALT 2006-J1 1A6 ����� � ��� ����CWL 2006-9 1AF6 (CWABS) � � � ��� ���CWALT 2006-30T1 1A3 ����� ��� ���CWHL 2006-9 A10 (CWMBS) ��� ��� �����CWL 2007-4 M1 ����� ���� �����CWALT 2007-20 A1

����� ���� ����CWALT 2007-18C 3FL3 ����� ����� ��CWHL 2005-HYB7 3A2 ����� ��� ���

127. The Offering Documents for certain of the Offerings also provided statistical data

about the range of CLTVs for the Mortgage Loans underlying Allstate’s Certificates.

Countrywide likewise misrepresented the Offering’s CLTV statistics. The Offering Documents

for CWL 2006-S1, CWL 2006-S5, and CWL 2007-S1, for example, each alleged that none of the

Mortgage Loans had a CLTV ratio greater than 100%. Despite Countrywide’s representations,

however, Allstate’s analysis has found that 9.8%, 12.6%, and 18.4% of the Mortgage Loans in

the three Offerings, respectively, had a CLTV ratio greater than 100%.

128. Countrywide did not genuinely believe the appraised values were reasonable

estimations of the properties’ values at the time they were given. As discussed below,

Countrywide knew that the appraisals were being inflated to allow borrowers to be approved for

loans that they could not afford. As such, it knew the LTV and CLTV statistics were baseless. It

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also failed to disclose the fact that many of the properties that collateralized the Certificates were

burdened by additional liens, a clear fact that should have been disclosed and is not based on any

“opinion.”

(4) Statistical studies by others have similarly revealed that the problems in Countrywide-originated loans were tied to underwriting abandonment

129. The F.B.I. Mortgage Fraud Reports of 2006 and 2007 reported on the results of a

study of three million residential mortgages that found that between 30% and 70% of early

payment defaults were linked to significant misrepresentations in the original loan

applications. Loans containing egregious misrepresentations were five times as likely to default

in the first six months than loans that did not.

130. Researchers at the University of Michigan have conducted studies that found that

the number of loans originated by Countrywide that suffered from a particular performance

problem – sixty or more days delinquent as of six months of origination – skyrocketed beginning

in 2006:

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131. The same studies showed that this drastic change did not occur because of a

change in the claimed FICO or LTV scores:

132. The fact that studies conducted by others show a spike in early payment problems,

despite the fact that key characteristics of the loan pools were supposedly not changing, is

powerful evidence that Countrywide was systematically abandoning its underwriting standards in

creating and characterizing those loans. As set forth above, Allstate’s investigation has

confirmed this to be the case with respect to Allstate’s Certificates as well. Exhibit D describes

the rates of delinquency of the Mortgage Loans in the Offerings in which Allstate invested.

(5) Other parties’ reviews of Countrywide’s full loan files have revealed even greater deviations

133. Third parties with access to the complete loan files for certain Countrywide

securitizations have performed additional analysis of the mortgage loans underlying

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Countrywide’s offerings. These include, among others, MBIA Insurance Corporation (“MBIA”)

and Syncora Insurance Company (“Syncora”). Their analyses provide additional strong evidence

that essential characteristics of the Mortgage Loans underlying the Certificates were

misrepresented and omitted material information, and that the problems in Countrywide’s

underwriting practices were systemic.

134. MBIA’s analysis included at least three of the same deals in which Allstate

invested: CWHEQ 2006-S8, CWHEQ 2007-S1, and CWHEQ 2007-S2. The other

Countrywide securitizations that were analyzed by MBIA include CWABS 2004-I, CWABS

2004-P, CWHEQ 2005-A, CWHEQ 2005-E, CWHEQ 2005-I, CWHEQ 2005-M, CWHEQ

2006-E, CWHEQ 2006-G, CWHEQ 2006-S9, CWHEQ 2006-S10, CWHEQ 2007-E, and

CWHEQ 2007-S3.

135. The other deals that MBIA analyzed are also probative of problems underlying

Allstate’s Certificates because the collateral pools for the securitizations that MBIA investigated

were composed of second-lien home-equity line of credit loans (“HELOCs”) and closed-end

second (“CES”) loans—the same type of collateral underlying some of Allstate’s Certificates.

For example, the CWHEL 2005-B Offering that Allstate invested in was collateralized by

HELOCs, while the CWL 2006-S1, CWL 2006-S2, CWL 2006-S5, CWL 2007-S1, and CWL

2007-S2 Offerings were all collateralized by closed-end fixed-rate loans secured by second liens

(i.e. CES loans). MBIA also found that the defective loans span Countrywide’s securitizations

from 2004 to 2007, demonstrating the consistency of Countrywide’s disregard for its own

underwriting guidelines over this period, the same period at issue in this case. Because

Countrywide’s violation of its underwriting guidelines was a systemic problem, MBIA’s findings

are equally applicable to all of Allstate’s Certificates.

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136. MBIA is a New York-based monoline insurer that wrote insurance on certain

Countrywide mortgage-backed securities offerings. MBIA conducted an investigation into

Countrywide’s loan files after it was asked to make payments to certain other investors.

137. In carrying out its review of the approximately 19,000 Countrywide loan files—

including loans that were securitized and sold to Allstate—MBIA found that 91% of the

defaulted or delinquent loans in those securitizations contained material deviations from

Countrywide’s underwriting guidelines. MBIA’s report showed that the loan applications

frequently “(i) lack key documentation, such as verification of borrower assets or income; (ii)

include an invalid or incomplete appraisal; (iii) demonstrate fraud by the borrower on the face of

the application; or (iv) reflect that any of borrower income, FICO score, debt, DTI [debt-to-

income,] or CLTV [combined loan-to-value] ratios, fails to meet stated Countrywide guidelines

(without any permissible exception).”

138. Syncora, another insurance company that insured Countrywide’s securitizations,

has conducted a similar re-review analysis of defaulted loans in the securitizations that it insured

to determine whether the loans had been originated in accordance with Countrywide’s

representations. Syncora found that 75% of the loans it reviewed “were underwritten in

violation of Countrywide’s own lending guidelines, lack any compensating factors that could

justify their increased risk, and should never have been made.” Syncora’s review is probative of

the problems underlying Allstate’s Certificates because it again shows Countrywide’s failures

during this key period of 2004 to 2007 were systemic.

139. Syncora gave examples of individual loans that diverged from Countrywide’s

guidelines. The individual defective loans analyzed by Syncora reflected a long list of

misstatements by Countrywide. Many loans violated the DTI ratios and LTV ratios set forth in

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Countrywide’s underwriting guidelines, without adequate compensating factors to justify the

increased risk of default, due in part to borrowers’ exaggerated incomes and exaggerated

property values. Loan amounts routinely exceeded the maximum amounts permitted under the

Company’s guidelines for each given borrower, based on a borrower’s credit score,

documentation, and property values. Countrywide also improperly issued loans to borrowers

when their loan files lacked adequate documentation of borrowers’ income, assets, credit,

employment, cash reserves, or property values.

140. In addition, the Illinois Attorney General reviewed the sales of Countrywide loans

by an Illinois mortgage broker and found that the vast majority of the loans had inflated

incomes stated in the documentation, almost all without the borrowers’ knowledge. This study

covered the time period of 2004 to 2007, again the same time period during which Countrywide

was generating the loans at issue here. Likewise, a review of 100 stated-income loans by the

Mortgage Asset Research Institute revealed that 60% of the income amounts were inflated by

more than 50% and that 90% of the loans had inflated income figures of at least 5%. Again, this

is highly probative of the problems underlying Countrywide’s Certificates as it covers the time

period of 2004 to 2007.

B. Countrywide’s Own Internal Documents Demonstrate It Abandoned Its “Theoretical” Underwriting Standards

141. The SEC recently made public many of Countrywide’s internal documents and

communications. As reflected below, these documents show that the representations at issue

here were untrue. The documents not only demonstrate that Countrywide’s underwriting failures

were systemic, implicating all of their loans generated at this time, but often directly deal with

the same exact type of loans, products, and processes underlying Allstate’s Certificates.

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However, Allstate had no way of knowing these misrepresentations because these internal

Countrywide documents were not available to Allstate and were only made public recently.

(2) Countrywide’s internal post-mortem shows it systematically ignored the risks created by its “matching” strategy

142. In November 2007, Countrywide prepared a “lessons learned” analysis. This

included key observations from interviews of Countrywide’s employees and culminated in an

internal presentation. In this analysis, Countrywide repeatedly admits that it was singularly

focused on market share and its “matching” strategy:

• “We were driven by market share, and wouldn’t say ‘no’ (to guideline expansion).”

• “Competitiveness and aggressiveness are great, and part of our DNA. However, it can lead to arrogance and lack of friends. There are times when our strengths can turn into our weaknesses.”

• “The strategies that could have avoided the situation were not very appealing at the time. Do not produce risky loans in the first place: This strategy would have hurt our production franchise and reduced earnings.”

• “Market share, size and dominance were driving themes . . . . Created huge upside in good times, but challenges in today’s environment. Net/net it was probably worth it.”

(Emphasis added).

143. Countrywide also repeatedly admits that the “matching” strategy led to product

development far outpacing its risk-assessment procedures and misaligned the incentives of its

employees:

• “With riskier products, you need to be exquisite in off-loading the risk. This puts significant pressure on risk management. Our systems never caught up with the risks, or with the pace of change.”

• “Risk indicators and internal control systems may not have gotten enough attention in the institutional risk and Board committees.”

• “Not enough people had an incentive to manage risk.”

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• “Decentralized and local decision making were another characteristic of our model . . . . The downside was fewer risk controls and less focus on risk, as the local decision makers were not directly measured on risk.”

• “Our wide guidelines were not supported by the proper infrastructure (credit, risk management).”

• “[W]e did not put meaningful boundaries around the [broad product] strategy, even when our instincts might have suggested that we do so, and we allowed the model to outrun its critical support infrastructure in investment and credit risk management . . . . Our risk management systems were not able to provide enough counterbalance . . . .”

• “The focus of production was volume and margin, not credit risk. There was also massive emphasis on share.”

• “Structure and capabilities of Secondary not in-sync with production.”

(Emphasis added).

144. Countrywide’s internal analysis of failures in its own underwriting guidelines is

directly relevant to Allstate’s Certificates because it is a home-grown analysis of Countrywide’s

systemic problems and occurred during the very time period when the loans underlying

Allstate’s Certificates were being generated, and when the Certificates were being issued.

(3) Mozilo’s emails show he “personally observed a serious lack of compliance”

145. In early 2006, HSBC had begun to contractually force Countrywide to buy back

certain defective loans. In a March 28, 2006 e-mail to Sambol and others, Mozilo admitted the

problems with the loans were caused by “errors of both judgment and protocol.” (Emphasis

added). The “errors” referred to in this email occurred at the same time as the Mortgage Loans

and Certificates at issue here.

146. In an April 13, 2006 e-mail, Mozilo wrote to Sieracki and others that he was

concerned that certain subprime loans had been originated “with serious disregard for process

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[and] compliance with guidelines,” resulting in the delivery of loans “with deficient

documentation”:

I want Sambol to take all steps necessary to assure that our origination operation “follows guidelines” for every product that we originate. I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]. In my conversations with Sambol he calls the 100% sub prime seconds as the “milk” of the business. Frankly I consider that product line to be the poison of ours. Obviously as CEO I cannot continue the sanctioning of the origination of this product until such time I can get concrete assurances that we are not facing a continuous catastrophe. Therefore I want a plan of action not only from Sambol but equally from McMurray as to how we can manage this risk going forward.

(Emphasis added).

147. In a June 1, 2006 e-mail regarding Pay-Option ARMs, Mozilo warned Sambol

and other executives that borrowers “are going to experience a payment shock which is going to

be difficult if not impossible for them to manage.” (In a Pay-Option ARM, the borrower can

make a payment even less than that required to pay off accruing interest. If the borrower does

this too many times, the amount of principal owed is recalculated, resulting in a sudden increase

in the minimum payments.) Mozilo warned that “[w]e know or can reliably predict what’s going

to happen in the next couple of years.” Mozilo reiterated his concern that the majority of pay-

option ARMs were originated using stated income, and that evidence suggested that borrowers

were misstating their incomes. He asked the executives to “assume the worst” and take

corrective measures to try and avoid the disastrous consequences of Countrywide’s lending

policies, including reducing its exposure to loans with low FICO scores.

148. In a September 26, 2006 email Mozilo admitted that with respect to pay-option

ARMs “we are flying blind on how these loans will perform” in a stressed environment.

Mozilo’s emails regarding pay-option ARMs are directly relevant here, because many of

Allstate’s Certificates included such loan products, such as the Certificates Allstate purchased in

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CWL 2005-1. But this admission reaches further, as Countrywide’s Chief Risk Officer

McMurray later would testify that “I do think you could generalize [this] observation to a much

broader set of loans than just pay option.”

149. According to the SEC, on May 29, 2007 Sambol and Sieracki attended a Credit

Risk Committee Meeting, in which they were informed that “loans continue[d] to be originated

outside guidelines,” primarily via the Secondary Structured Lending Desk without “formal

guidance or governance surrounding” the approvals. This admission is probative of how the

Mortgage Loans at issue here were generated, given that the admission covered the heart of the

period when the loans underlying Allstate’s Certificates were being generated.

(4) Internal quality reviews highlight that loans were being issued outside of Countrywide’s underwriting guidelines

150. On May 22, 2005, John McMurray, Countrywide’s then-Chief Risk Officer,

warned Sambol that loans which were originated as exceptions to Countrywide’s stated

origination guidelines would likely experience higher default rates. He wrote that “exceptions

are generally done at terms more aggressive than our guidelines” and recommended that

“[g]iven the expansion in guidelines and the growing likelihood that the real estate market will

cool, this seems like an appropriate juncture to revisit our approach to exceptions.” (Emphasis

added).

151. In June 2005, McMurray warned Sambol in an e-mail exchange that “as a

consequence of [Countrywide’s] strategy to have the widest product line in the industry, we are

clearly out on the ‘frontier’ in many areas,” adding that that “frontier” had “high expected default

rates and losses.” He also told Sambol that because of the “matching” strategy, Countrywide’s

guidelines “will be a composite of the outer boundaries across multiple lenders,” and that the

resulting “composite guides [sic] are likely among the most aggressive in the industry.

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152. McMurray’s 2005 emails describe how Countrywide’s “matching” strategy was

resulting in a “composite” process more aggressive than any other in the industry. These emails

are relevant not only because many of the Mortgage Loans at issue here were being issued at that

time, but also because Countrywide’s “matching” strategy only accelerated as more of the loans

at issue here were generated.

153. In a June 2006 email chain that included both McMurray and Sambol,

Countrywide circulated the results of an audit it had conducted. Among the findings were that

“approximately 40% of the Bank’s reduced documentation loans . . . could potentially have

income overstated by more than 10% and a significant percent of those loans would have

income overstated by 50% or more.” McMurray admitted that it’s “obviously the case” that

“perhaps many” of these overstatements were the result of misrepresentations. Another

Countrywide Risk Officer, Clifford Rossi, agreed, testifying that “the vast majority” of the

overstated income amounts was “likely” due to misrepresentations. This analysis of

misstatements in the applications for reduced-documentation loans is highly relevant to

Allstate’s Certificates, because the analysis was conducted at the same time many of the

Mortgage Loans at issue here were generated, and because many of the Mortgage Loans were

issued on a reduced-documentation basis—indeed, as Allstate’s analysis has shown, even more

than Allstate was told at the time.

154. Around the same time, according to the SEC, there was a credit meeting where

attendees were informed that one-third of the loans referred out of Countrywide’s automated

underwriting system violated “major” underwriting guidelines, 23% of the subprime first-lien

loans were generated as “exceptions,” and that “exception” loans were performing 2.8 times

worse than loans written within guidelines. That the loans approved by exceptions were

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performing so much worse than other similar loans is itself strong evidence that the “exceptions”

were not being granted based on any purported countervailing circumstances in the borrowers’

credit profile.

155. At that same meeting, the Committee discussed evidence of borrower

misrepresentation of incomes and occupations on reduced-documentation loan applications. And

according to the SEC, at an earlier meeting it was revealed that “exceptions” were being granted

to accommodate ineligible borrowers, and in November 2006 Sieracki was informed that there

was an increased volume of Suspicious Activity Reports being filed related to mortgage fraud.

156. These studies are highly probative of the hidden problems in the Mortgage Loans

at issue here, as Countrywide’s self-analysis was conducted in mid-2006, just as many of the

Mortgage Loans it would have been studying were being included in the pools underlying

Allstate’s Certificates.

157. On November 2, 2006, McMurray asked Countrywide’s Chief Investment

Officer, in an e-mail forwarded to Sambol, whether Countrywide “want[s] to effectively cede”

its underwriting policies to the market.

158. In a February 11, 2007 e-mail to Sambol, McMurray reiterated his concerns about

Countrywide’s strategy of matching any type of loan product offered by its competitors, which

he said could expose the Company to the riskiest offerings in the market: “I doubt this

approach would play well with regulators, investors, rating agencies[,] etc. To some, this

approach might seem like we’ve simply ceded our risk standards . . . to whoever has the most

liberal guidelines” (emphasis added).

159. During a March 12, 2007 meeting of Countrywide’s credit risk committee, the

Risk Management department reported that 12% of Countrywide loans that were reviewed

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internally were rated “severely unsatisfactory” or “high risk” because the loans had loan-to-

value ratios, debt-to-income ratios, or FICO scores outside of Countrywide’s already-wide

underwriting guidelines. Again, this self-scrutiny covered loans being generated during the

same period as those underlying Countrywide’s Certificates.

160. In a May 7, 2007 letter to the Office of Thrift Supervision, Countrywide admitted:

“Specifically looking at originations in the fourth quarter of 2006, we know that almost 60% of

the borrowers who obtained subprime hybrid ARMs [from Countrywide] would not have

qualified at the fully indexed rate.” Countrywide also admitted that “almost 25% of the

borrowers would not have qualified for any other [Countrywide] product.” In other words,

Countrywide was shuffling borrowers to exotic products because the borrowers could not afford

anything else, making those loans all the riskier. Many of these exotic products made their way

into Allstate’s Certificates, even though Allstate was never told that Countrywide knew such an

incredibly high number of borrowers could not afford the payments on any other type of

products.

161. In a December 13, 2007 internal memo from Countrywide’s enterprise risk

assessment officer to Mozilo, the officer reported that Countrywide had re-reviewed mortgages

originated by Countrywide in 2006 and 2007 “to get a sense of the quality of file documentation

and underwriting practices, and to assess compliance with internal policies and procedures.”

Countrywide found that “borrower repayment capacity was not adequately assessed by the bank

during the underwriting process for home equity loans.” (Emphasis added). That the study

covered two complete years when loans were being generated for inclusion in Allstate’s

Certificates makes it highly relevant to this action.

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(5) Exceptions were used as a way to deploy the “matching” strategy, despite Countrywide’s “theoretical” underwriting guidelines

162. Frank Aguilera, a Managing Director responsible for risk management, reported

the “particularly alarming” results of an internal review on June 12, 2006. He reported to others

in Countrywide that 23% of the subprime loans at the time were generated as exceptions, even

taking into account “all guidelines, published and not published, approved and not yet

approved.” Again, this study occurred during the same period in which loans were being

generated and included in Allstate’s Certificates. The exception rate for “80/20” products (which

are particularly risky because they provide 100% financing) was even higher—Allstate’s

Certificates included many such loans. The CWHL 2005-HYB7 Offering that Allstate invested

in, for example, included such 80/20 loans. Aguilera wrote at the time that “The results speak

towards our inability to adequately impose and monitor controls on production operations.”

(Emphasis added).

163. In February 21, 2007 Aguilera disputed a belief stated by someone else in a prior

meeting that there was adequate controls with regards to exceptions in certain areas, and stressed

how the guidelines were meaningless when so many exceptions were being granted: “Our

review of January data suggests that these controls need to be reviewed. Any guidance

tightening should be considered purely optics with little change in overall execution unless

these exceptions can be contained.” (Emphasis added).

164. As an example, he provided data on loans that were approved as “exceptions”

despite having high loan-to-value ratios. He found “significant levels of exceptions” under “all

high risk programs. Full Spectrum Lending, Countrywide’s subprime-mortgage affiliate was

called out for “in particular exceed[ing] any imaginable comfort level.” (Emphasis added). His

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email highlighted that 52% of 100% LTV loans by Full Spectrum Lending were issued by way

of “exceptions.” Overall, 37% of such loans studied required “exceptions.”

165. In June 2007, Executive Vice President of Credit Risk Management Christian

Ingerslev provided a “granular performance assessment of 2006 Vintage Non-Conforming 1st

lien loans that have been (or should be) going to the Secondary [Structured Loan Desk] for

exception approval . . . plus loans that [Correspondent Lending Division] is buying in bulk

outside the guidelines.” In other words, he was reviewing the type of loans that were all being

done outside of Countrywide’s already-wide “normal” underwriting standards. Many of

Allstate’s Mortgage Loans were being generated at the time Ingerslev was analyzing. His

analysis concluded that “nearly every” low documentation sector reviewed exhibited “subprime-

like” performance. Allstate’s Mortgage Loans included low-documentation loans such as those

studied by Ingerslev here, including those generated at around the same time. “There is

currently no formal policy or agreed upon process which identifies what Secondary can or

should price, other than what they have identified as ‘unsalable’ (same goes for CLD bulk

bids). While I’ve asked, I have not seen a comprehensive list of what they are saying no to.”

(Emphasis added).

166. Ingerslev wrote this to Chief Investment Officer Kevin Bartlett because he

“understand[s] you are directing a project to make Production’s theoretical requirement to

underwrite a reality. Under that scenario, should the line in the sand still be ‘unsalable’?

After looking at the performance, it’s hard to recommend anything other than no. Heretofore

that has been a challenging edit for Credit to implement (for obvious reasons) and the outcry is to

just price the risk – regardless of performance.” (Emphasis added). Here, Countrywide admits

that its underwriting policies were viewed as being merely “theoretical,” with the only real

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standard was “unsalable.” This admission came at a time when many of the Mortgage Loans

underlying Allstate’s Certificates would have been or were about to be generated.

167. The above statistics regarding the massive abuse of “exceptions,” though justly

described as “alarming” by Aguilera, should not have been surprising given the purpose of the

Countrywide’s exception policy was to ensure that all loans were approved. For example, in an

April 14, 2005 email chain, various managing directors were discussing what FICO scores

Countrywide would accept. One Managing Director wrote that the “spirit” of the exception

policy was to “provide flexibility and authority to attempt to approve all loans submitted under

an approved program/guideline which are later determined to be outside.” (Emphasis added).

He went on: “I would argue that the [exception] policy would also contemplate more general

exceptions such as . . . to keep pace with fast changing markets prior to submitting a formal

change.” (Emphasis added). In other words, he admitted that the exception process was a way

for Countrywide to cover its mistakes by retroactively re-approving loans that should have not

been approved in the first place, and a way to ensure Countrywide could lead the race to the

bottom. This is probative of Allstate’s Certificates not only because the admission occurred

around the same time as when many of the Mortgage Loans underlying Allstate’s Certificates

were being originated and securitized, but also because Countrywide’s corporate “matching”

policy driving the need to “keep pace” with the industry continued throughout the period relevant

to this case.

168. Another internal Countrywide document described the objectives of

Countrywide’s Exception Processing System to include “[a]pprov[ing] virtually every borrower

and loan profile,” with “pricing add on” (i.e., additional fees) if necessary to offset the risk.

(Emphasis added). The objectives also included providing “[p]rocess and price exceptions on

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standard products for high risk borrowers.” Sambol identified during his testimony a February

13, 2005 email he wrote that similarly said that the “purpose of the [Structured Loan Desk] and

our pricing philosophy” should be expanded to include that “we should be willing to price

virtually any loan that we reasonably believe we can sell/securitize without losing money, even

if other tenders can’t or won’t do the deal.” (Emphasis added).

(6) Countrywide admits to “cherry picking” deals

169. On August 2, 2005, Sambol actually questioned the company’s policy of “cherry

picking” the best loans for itself while leaving the higher-risk leftovers for securitization:

While it makes sense for us to be selective as to the loans which the Bank retains, we need to analyze the securitization implications on what remains if the bank is only cherry-picking and what remains to be securitized/sold is overly concentrated with higher risk loans. This concern and issue gets magnified as we put a bigger percentage of our pay option production into the Bank because the remaining production then increasingly looks like an adversely selected pool.

(Emphasis added).

170. Mozilo responded the same day:

I absolutely understand your position however there is a price we will pay no matter what we do. The difference being that by placing less attractive loans in the secondary market we know exactly the economic price we will pay when the sales settle. By placing, even at 50%, into the Bank we have no idea what economic and reputational losses we will suffer not to say anything about restrictions placed upon us by regulators.

(Emphasis added).

(7) In short, Countrywide “basically continued to operate as though they never received” risk policies.

171. In a March 23, 2006 email, Chief Risk Officer McMurray circulated a “Policy on

High Risk Products.” He wrote that there were also “many meetings and other conversations”

where the policy issues were discussed. Nonetheless, over a year later, on September 7, 2007 he

admitted: “I was never supported on this and Secondary, Production, and CCM basically

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continued to operate as though they never received this policy.” (Emphasis added). Similarly,

on February 9, 2006, McMurray had circulated additional policy guidance, including asking

“should we really even be offering this product?” He complained at the time that he’s

“continuing to encounter resistance to my efforts and instructions to rein in this program.”

(Emphasis added). In 2007 he summarized: “I wasn’t supported on this.”

172. In a March 7, 2005 email, the Vice President of Product Management (Christian

Ingerslev) similarly complained:

[S]ounds like they got on the line with the traders, and long story short, they now think they can sell them . . . . [I]t’s frustrating to try and hold the line just to be overridden with whining and escalation. [J]ust reinforces that sales can have anything they want if they yell loud enough to Drew [Gissinger, President of Countrywide Home Loans].

(Emphasis added).

173. In November 2006, McMurray reiterated to Sambol his view on “fundamental

deficiencies” within Countrywide with regard to risk:

First, we need to agree on a risk vision and guiding principles that the entire enterprise will follow. I previously created a set of guiding principles, but there hasn’t been acceptance from some of the key business units. The most widely held belief is that our guiding principle is simply doing what anyone else in the market is doing; if it’s in the market, we have to do it.

Second, we should require everyone to follow established risk guidance and policies[;] a product cannot be rolled out or transactions closed without required approvals. There are several recent examples where products or transactions proceeded without the required risk approvals or in contradiction of established policy.

(Emphasis added).

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C. The Sworn Testimony of Countrywide’s Own Former Officers Demonstrate That It Abandoned Its “Theoretical” Underwriting Standards

174. The SEC has recently made available the testimony given by Countrywide’s

former executives in its action against Mozilo and others. As described below, this testimony

again confirms that the Offering Materials were false and misleading.

(1) Chief Risk Officer John McMurray: “Matching policy” resulted in “routinely” using loan “exceptions”

175. “Matching strategy” routinely deployed by way of exceptions – even after his

department had rejected a proposed transaction. McMurray admitted that the “matching

strategy” was a “a corporate principle and practice that had a profound effect on credit policy.”

In fact, he thought it was not possible to understand Countrywide’s underwriting policies without

knowing of and understanding the matching strategy, and that the strategy was rolled out by use

of “the exception desks,” which happened “routinely.”

176. He testified that he was aware that there were instances where his credit risk

department “would reject proposals for new products but the people in sales nevertheless used

the exceptions procedure to achieve the same result.” He was “surprised, angry, and

disappointed,” for instance, when he found out that despite being previously rejected

Countrywide had advertising fliers promoting loans that had low FICO requirement, only

required a stated (non-documented) income, and provided 100% financing. The CWALT 2007-

18CB, CWALT 2007-20, and CWALT 2006-J1 Offerings, for example, contained Mortgage

Loans that were originated according to a Stated Income/Stated Asset Documentation Loan

Program, where income and asset information was not verified and borrowers were not required

to give proof of income or assets, and a No Income/No Asset Documentation Program, where no

documentation relating to a prospective borrower’s income, employment or assets was required.

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177. McMurray believed those loans were being issued through exceptions despite

such a program being previously rejected by his team. More generally, he also testified that he

was “fairly certain” he had conversations with others in Countrywide, including Sambol, about

the fact that exceptions were being made without sufficient compensating factors.

178. McMurray also agreed that the use of exceptions, even as a general matter, made

the process more risky: “Almost by definition, you are dealing with a riskier transaction” when

the loan is approved by an exception, and in fact there were areas where his group found a “big

disparity” in performance between “exception” loans and others. That the “exception” loans

were performing so much worse is strong evidence that the exceptions were not being used based

on countervailing positive features of the borrower’s credit profile.

179. Expanding guidelines because of the “matching strategy” increased the default

risk. McMurray admitted that underwriting “guidelines were expanding” at Countrywide from

September 2003 and the middle of 2007—i.e., throughout the period when Countrywide was

originating and securitizing Allstate’s Mortgage Loans. This guideline “drift” was a concern of

his because “even if you undertake measures to transmit that risk outside the company, you’re

still starting with more risk that needs to be distributed.” He admitted that “the idea of risk being

sold off, [] that was a key part of Countrywide’s strategy.”

180. He also admitted in his testimony that “there’s [a] relationship between expanding

underwriting guidelines and a probability of a loan going to default or serious delinquency.”

McMurray testified that he shared his concerns about this correlation with others at Countrywide,

including Mozilo, Sambol, and Sieracki.

181. McMurray also testified that he raised concerns about the “composite” effects of

Countrywide’s “matching strategy.” He explained:

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[I]f you match one lender on – on one – on certain guidelines for certain products and then you match a separate lender on a different product or a different set of guidelines, then in my view the composite of that – of that two-step match would be more – would be more aggressive than either one of those competitor reference points viewed in isolation.

He further testified that he was concerned about “companion mitigants” that would allow

competitors to use the products Countrywide was matching only because they had additional

terms not in Countrywide’s system, such as additional credit history requirements. In short, “the

chief concern on [the matching strategy] is that some of your risk standards get ceded to other

institutions by following that strategy. That is my chief concern.” McMurray testified that

whether Countrywide was “ceding our credit policy to the most aggressive players in the market”

was a “pretty serious concern” he had, which he raised with others in Countrywide including his

supervisor Bartlett.

182. Countrywide securitized the worst loans, keeping the better ones for itself.

McMurray testified that he specifically raised concerns about the risks presented by

Countrywide’s securities. Part of this concern was not only Countrywide’s aggressive standards,

but also that:

There’s another element that we need to bring in here that’s important with respect to securities performance. Countrywide’s bank tended to – on – on some of the key products, tended to select the best loans out of the ones that were originated. By best – I’m talking about from a credit risk standpoint, so let me clarify that. So as – as those loans are drawn out of the population, what’s left to put into the securities were not – are not as good as what you started out with, and then that can have an adverse effect on securities performance.

183. That Countrywide was “cherry-picking” the loans it would keep for itself was also

confirmed by the testimony of Clifford Rossi, a Countrywide Risk Officer, who testified that the

“bank was to originate and to cherry pick the better quality assets.”

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(2) Vice President of Credit Risk Management Christian Ingerslev: “Focus groups” confirmed borrowers were misrepresenting income

184. Christian Ingerslev, Countrywide’s Executive Vice President of Credit Risk

Management, testified that Countrywide used “focus groups,” which made it “seem[] like it was

the case” that “income was being overstated to reality in some cases.” He testified that

Sambol, among others, was aware of these results because he spoke to Sambol about them.

Upon information and belief, these focus groups occurred during the same period when

Countrywide was generating the Mortgage Loans relevant here.

185. Ingerslev agreed that “loan quality relate[s] to or bear[s] upon the issue of

likelihood of default or serious delinquency. He thought it to be an “intuitive” conclusion that

loans with higher loan-to-value ratios have a higher risk of default. He testified:

[People default] when an income disruption event happens in their lives . . . and when that unexpected event happens in people’s lives, if they have an equity cushion in their home, they have something to sort of stem off the short-term problem . . . . If people were buying homes, you know, beginning without any cushion, they were going to be more susceptible to this income disruption event. And, again, this is intuitive sense based on my experience in the business and not necessarily analytical, but then when we attempted to model it, our modeling group attempted to model it, you know, we showed some more results where the expected default rates were going to be pretty high.

This is highly probative of the issues in this case because, as discussed above, Countrywide was

materially misrepresenting the actual LTV ratios of Allstate’s Mortgage Loans.

186. Ingerslev confirmed that internal documentation showed that products and

transactions were even going forward “without the required risk approvals or in contradiction

of established policies.” He testified that there was no “systemic way” to stop this from

happening because “you’re talking about human beings, not systems.” He also testified there

was no “consequence or penalty” for originating loans that had not been signed off by

McMurray.

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(3) Managing Director Frank Aguilera: “Matching” strategy was “not a tolerable process” for subprime products

187. The testimony of Frank Aguilera, a Managing Director responsible for risk

management, confirms that the company followed a “matching strategy.” To support this

strategy, the company even created a large database of products offered by competitors so that if

somebody tried to convince Countrywide to approve a new product all it had to do was to check

the database to see if someone else had already approved it. He also testified that he did not

think investors were aware of Countrywide’s internal “matching” strategy.

188. Aguilera was “surprised” this strategy was deployed not just to the more well-

developed prime loans, but also the riskier subprime loan area. He testified that “from a credit

perspective, my view, it’s not a tolerable process.” He raised his concerns formally with at least

two other managers at Countrywide.

189. Aguilera confirmed that the way this “matching” strategy was implemented was

through Countrywide’s “exception” processes. This confirms Countrywide was using its

“exception” processes in order to gain market share and increase loan volume by working around

its stated underwriting guidelines. He also testified that “90 percent” of his time as the person

responsible for Countrywide’s “technical manuals” was spent on “expansions” of the guidelines.

(4) CEO Angelo Mozilo: Matching strategy was a “dangerous game”

190. In his testimony, Mozilo admitted that “if the only reason why you offered a

product, without any other thought, any other study, any other actuarial work being done is

because someone else was doing it, that’s a dangerous game to play.”

(5) Depositor President Nathan Adler: “Salability” was the sole factor for giving “exceptions”

191. Defendant Nathan Adler, the President of many of the Depositor Defendants here,

testified about the “evolution” of the Structured Loan Desk. He testified that Countrywide’s

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exception policy had “core guidelines.” If those were not met, the company also had “shadow”

guidelines. If even those were met, the loans were given to “Secondary Marketing to determine

if the loan could be sold given the exception that was being asked for.” Thus “salability” was a

“factor in the determination of whether to make a loan on an exception basis.” Indeed, by the

time the loan reached Adler whether the loan could be sold in the secondary market was “the

only criteria that we followed.” Upon information and belief, “salability” was the sole factor

governing final approval or denial of the Mortgage Loans throughout the relevant period.

D. Other Statements Provided By Countrywide Employees and Customers Further Confirm Countrywide’s Abandonment of its Underwriting Standards

(1) Former employees: Borrowers were coached on how to use no-doc loans to circumvent prior loan rejections

192. Mark Zachary is a former Regional Vice President of Countrywide who claims he

was fired for airing his concerns about Countrywide’s underwriting practices. He told Larry

King of CNN that if a borrower did not qualify for a conventional loan, Countrywide’s loan

officers would often steer the borrower into riskier loans that did not require documentation, so-

called “liar loans.” Allstate’s Mortgage Loans included low-documentation loans such as those

described by Zachary here. Indeed, as alleged herein, Allstate’s Certificates included many more

loans approved on less than a fully documented application than the Offering Materials let on.

193. In a February 13, 2007 e-mail to one of his supervisors, the Senior Vice President

Divisional Manager of Countrywide KB Home Loans, a joint venture between Countrywide and

KB Homes, a homebuilder, Zachary said that “it seems to be an accepted practice for

[Countrywide] to have a full doc loan and then if it can’t be approved . . . we flip to a stated[-

income loan] and send to FSL [Full Spectrum Lending, Countrywide’s subprime-mortgage

affiliate] under non-prime (sub-prime business unit).”

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194. Once in the low-documentation process, “the income stated on those loans

generally was not a true representation of what the person normally makes.” Zachary confirmed

that Countrywide employees were coaching applicants to lie, including overstating their income

by as much as 100% to qualify for a loan. According to Zachary, loan officers would coach

potential homeowners on the income levels needed to qualify for a given mortgage loan and

would then accept revised loan applications from those borrowers which contained an inflated

reported income.

195. Other former employees have similarly confirmed that Countrywide coached

borrowers how to falsify their low- or no-documentation loan applications in order to circumvent

the normal underwriting process. For instance, a former Countrywide loan officer described in

the California Attorney General’s complaint against Countrywide reiterated the fact that

borrowers were coached on how to lie. He explained that a loan officer might say, “with your

credit score of X, for this payment, and to make X payment, X is the income you need to make.”

And NBC News reported that it spoke to six other former Countrywide employees, who worked

in different parts of the country, who described the same “anything goes” corrupt culture and

practices. Some of those employees even said that borrowers’ W-2 forms and other documents

were falsified to allow for loan approval. One employee stated that “I’ve seen supervisors stand

over employees’ shoulders and watch them . . . change incomes and things like that to make

the loan work.”

196. Given that Countrywide was often coaching borrowers on how to falsify their

applications, or even making changes without the borrower’s knowledge, it is not surprising that

Countrywide did not seek to confirm that the information being provided to it was accurate. A

former supervising underwriter at Countrywide explained that the company declined to check

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bank balances for applicants applying for stated-income, stated-asset loans that provided account

information. Countrywide also had the right to verify the income stated on a loan application by

use of Internal Revenue Service data, but only 3% to 5% of the loans that Countrywide issued by

2006 were checked. This period covers many of the Mortgage Loans that would have

collateralized Allstate’s Certificates.

197. For stated-income loans, where Countrywide promised that it would exercise

discretion, during the 2005-2006 period the company directed loan officers to support their

assessments by referring to the website www.salary.com. Again, this period covers many of the

loans that would have collaterlized Allstate’s Certificates. This practice was reported by former

employees cited in the Illinois Attorney General’s complaint against Countrywide. The website

did not provide specific salary information for any particular borrower, but provided a range of

salaries for particular job titles based upon the borrower’s zip code. And even when the salaries

were outside the ranges, Countrywide did not require its employees to follow-up with the

borrower.

198. One Countrywide employee estimated that approximately 90% of all reduced-

documentation loans sold out of the employee’s Chicago office had inflated incomes. One of

Countrywide’s mortgage brokers, One Source Mortgage Inc., routinely doubled the amount of

the potential borrower’s income on stated income mortgage applications. Similarly, according to

a confidential witness relied on by plaintiffs in other actions, as much as 80% of the loans

originated by Countrywide out of its Jacksonville processing center between June 2006 and April

2007—i.e., when many of the loans at issue here were being generated—had significant

variations from Countrywide’s theoretical underwriting standards.

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(2) Former employee: Countrywide knew appraisals were being inflated

199. In September 2006, Zachary informed Countrywide executives that there was a

problem with appraisals performed on KB Home properties being purchased with mortgage

loans originated by Countrywide. According to Zachary, Countrywide executives knew that

appraisers were strongly encouraged to inflate appraisal values by as much as 6% to allow

homeowners to “roll up” all closing costs. According to Zachary, this practice resulted in

borrowers being “duped” as to the true values of their homes. This also made loans more risky

because when values were falsely increased, loan-to-value ratios calculated with these phony

numbers were necessarily incorrect.

200. Zachary brought his concerns to executives of the Countrywide/KB Homes joint

venture, as well as Countrywide executives in Houston, Countrywide’s Employee Relations

Department and Countrywide’s Senior Risk Management Executives. According to Zachary,

Countrywide performed an audit investigating these matters in January 2007, and the findings of

the audit corroborated his story. According to Zachary, the findings of this audit were brought to

the attention of Countrywide executives.

(3) Borrowers: Countrywide falsified our records

201. Julie Santoboni, who took out a Countrywide mortgage on her family’s home in

Washington, D.C., was interviewed on National Public Radio. She explained that she has owned

several homes and that she and her husband are professionals. Nonetheless, when the family

reached out to Countrywide to refinance their home’s adjustable-rate loan, a Countrywide loan

officer pressured her to lie about her income to obtain a more attractive loan, since she had

taken off two years of work for her children. The employee said that he could increase her

husband’s listed income, that the underwriters would not question the income because her

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husband’s job title included the word “manager,” and that the employee’s boss would also not

verify the stated income.

202. Santoboni also said that the Countrywide loan officer wanted her to write a letter

stating she made $60,000 during each of the past two years and get her accountant to sign it,

even though that would have been fraudulent, since she had no income. The loan officer

continued to give her a “hard sell,” pressuring her to lie about her income in order to obtain a

more favorable interest rate on the loan. Santoboni followed up with Countrywide to complain

about the incident but received no response as of the time of the interview. She made a

complaint with the Federal Office of Thrift Supervision about the wrongdoing.

203. Another Countrywide borrower, Bruce Rose, described obtaining a mortgage loan

from Countrywide that stated his monthly income as $12,166, as he realized only later, when his

income at the time was only around $16,000 a year.

204. One borrower told NBC News that her Countrywide loan officer told her to claim

she made more than twice her actual income in order to gain approval for her loan.

205. A potential Countrywide customer known to Zachary complained to Countrywide

in a September 19, 2006 e-mail that “I was told that my loan had been turned over to

Countrywide’s internal fraud department for review because a loan officer increased my income

figures without authorization in order to get me approved for the stated-income loan. I was

told by several people at Countrywide that this was done just to get me qualified and that nobody

would check on it.”

(4) Former employees: Countrywide steered borrowers to riskier (higher fee) products and heavily incentivized employees to do so

206. Riskier loans were more profitable for Countrywide, which provided an incentive

to systematically encourage the use of riskier products. A former employee provided documents

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to the New York Times indicating that Countrywide’s profit margins ranged from three to five

percent on regular subprime loans, but that loans which included heavy burdens on borrowers,

such as high prepayment penalties that persisted for three years, Countrywide’s profit margins

could reach as high as fifteen percent of the loan.

207. Because Countrywide had a higher incentive to originate higher-risk loans, it

similarly incentivized its employees to do so. For instance, it paid employees who originated

loans in part based on the volume and dollar value of the loans they approved. A substantial

portion of the salary of Countrywide’s sales employees was based on commissions, which gave

the employees a strong incentive to maximize sales volume and close the maximum number of

mortgage loans regardless of quality. For example, Countrywide’s wholesale account

executives, the employees who dealt with brokers, were paid only on commission – they had no

base salary.

208. Because of the higher origination fees charged with respect to nontraditional

loans, employees and independent mortgage brokers were paid more when originating

nontraditional loan products than when they originated standard loans. Former Countrywide

mortgage brokers reported that brokers received commissions of 0.50% of the loan’s value for

originating subprime loans, while their commission was only 0.20% for less-risky loans.

Moreover, adding a three-year prepayment penalty to a mortgage loan would generate an extra

commission for the Countrywide employee of 1% of the loan’s value. Persuading someone to

add a home equity line of credit to a loan carried an extra commission of 0.25%.

209. That Countrywide was incentivized to push high-risk products—including on

borrowers who did not understand and could not afford them—directly impacts the Mortgage

Loans at issue here. Many of Allstate’s Certificates were backed with such “exotic” products

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generated at the time when these incentives were in place, such as the Certificates Allstate

purchased in the CWL 2005-1 Offering.

E. Other Evidence That the Representations Were False

(1) Appraisal company: Countrywide pressured companies to obtain inflated home values

210. As described above, Countywide touted the Mortgage Loans’ LTV ratios,

including emphasizing that they were based on the use of independent appraisers. In fact,

Countrywide Home Loans regularly engaged appraisers that were affiliated with Countrywide,

including appraisers that were owned or controlled by Countrywide, either directly or indirectly

through intermediate subsidiaries or otherwise subject to Countrywide’s influence. This created

a conflict of interest. As originator and securitizer of the loans, Countrywide had an incentive to

inflate the value of properties because doing so would result in lower LTV ratios. A lower LTV

ratio would allow a loan to be approved when it otherwise would not be, and would appear less

risky to Allstate and other investors. But loans based on inflated appraisals are more likely to

default and less likely to produce sufficient assets to repay the second lien holder in foreclosure.

211. The appraisals in practice were not intended to determine the adequacy of the

collateral in the event of a default, but rather to ensure that a large volume of mortgages were

rapidly originated, underwritten and securitized with no regard to the value of the collateral.

212. According to Capitol West Appraisals, LLC, a company that has provided real

estate appraisals to mortgage brokers and lenders since 2005, and is a “review appraiser” for

Wells Fargo, Washington Mutual and other lenders, Countrywide Financial and Countrywide

Home Loans engaged in a pattern and practice of pressuring even non-affiliated real estate

appraisers to increase appraisal values artificially for properties underlying mortgages

Countrywide Home Loans originated. Capitol West stated that Countrywide Home Loans

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officers sought to pressure Capitol West to increase appraisal values for three separate loan

transactions. When Capitol West refused to vary the appraisal values from what it independently

determined was appropriate, Countrywide Home Loans retaliated.

213. In particular, according to Capitol West, from at least 2004, and likely before, and

continuing through at least 2007—i.e., for the relevant period when the Mortgage Loans at issue

here were being originated and securitized into the Certificates—Countrywide Home Loans

maintained a database titled the “Field Review List” containing the names of appraisers whose

reports Countrywide Home Loans would not accept unless the mortgage broker also submitted a

report from a second appraiser. Capitol West was placed on the Field Review List after refusing

to buckle under the pressure to inflate the value of the properties. No mortgage broker would

hire an appraiser appearing on the Field Review List to appraise real estate for which

Countrywide Home Loans would be the lender because neither the broker nor the borrower

wanted to pay to have two appraisals done. Instead, the broker would simply retain another

appraiser who was not on the Field Review List.

214. According to Capitol West, Countrywide Home Loans created certain procedures

to further enforce its blacklisting of uncooperative appraisers like Capitol West. Specifically, if a

mortgage broker were to hire an appraiser that happened to be on the Field Review List,

Countrywide’s computer systems automatically flagged the underlying property for a “field

review” of the appraisal by LandSafe, Inc., a wholly owned subsidiary of Countrywide Financial.

LandSafe would then issue another appraisal for the subject property that, without exception,

would be designed to “shoot holes” in the appraisal performed by the blacklisted appraiser such

that the mortgage transaction could not close based on that appraisal. Indeed, according to

Capital West, in every instance, LandSafe would find defects in the appraisal from the

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blacklisted appraiser, even if another, non-blacklisted appraiser had arrived at the same value for

the underlying property and the non-blacklisted appraiser’s appraisal was accepted. According

to Capitol West, this exact set of facts happened with respect to an appraisal it submitted after it

was placed on the Field Review List.

215. Because Countrywide was one of the nation’s largest mortgage lenders, a

substantial portion of any mortgage broker’s loans was submitted to Countrywide. Because a

broker could not rule out that Countrywide would be the ultimate lender, and because mortgage

brokers knew from the blacklist that a field review would be required if a blacklisted appraiser

were chosen, with the likely result that a mortgage would not be issued with that appraisal, and

that its mortgage applicant would have to incur the cost of retaining another appraiser, such a

broker had a strong incentive to refrain from using a blacklisted appraiser. By these means,

Countrywide systematically and deliberately enlisted appraisers in its scheme to inflate

appraisals and issue low-quality, extremely risky loans.

216. Several claims have been filed against Countrywide and related entities which

describe individual homeowners’ experiences with inflated property appraisals in obtaining

mortgages from Countrywide. Such lawsuits include three class actions brought by homebuyers

against KB Home, a building company that used Countrywide as its exclusive lender: Zaldana

v. KB Home, No. 3:08-cv-03399 (MMC), currently pending in the United States District Court

for the Northern District of California; Johnson v. KB Home, 2:09-cv-00972 (MHB), currently

pending in the United States District Court for the District of Arizona; and Bolden v. KB Home,

No. BC385040, currently pending in Los Angeles County Superior Court.

217. The Arizona complaint cites two KB Home developments in which sample

appraisals were inflated by $82,169 per property on average. The plaintiffs’ lawyer explained

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that “Even if we used a more conservative $20,000 per property” in inflated value, “this alleged

scheme would add ($280 million) in ill-gotten profits in KB’s pockets. Those profits come at the

expense of the homeowner, who moves into a house [on which the mortgage exceeds the

property’s value], and the secondary market, buying tainted investments.” The complaint cites

instances of appraisals that used pending sales within the same development as comparable

properties substantiating appraisal values.

218. Bolden v. KB Home describes the experiences of Deborah and Lonnie Bolden,

who purchased a KB Home residence in a new development in California’s Central Valley. She

obtained an appraisal on the property from LandSafe, Countrywide’s in-house appraisal

company. She also used Countrywide’s in-house real-estate agents and mortgage brokerage.

The property was appraised at $475,000. But a neighbor with an identical home was given an

appraisal from an outside company, not affiliated with Countrywide, of $73,000 less.

219. Bolden found that the outside company had based the appraisals on sales of

comparable homes in the same subdivision, whereas an investigation at the country assessors’

office showed that LandSafe had made its appraisal based on erroneous comparable-sales data,

using properties outside of the immediate area and properties in the development with misstated

purchase prices, which artificially inflated her property’s value. For example, the listed purchase

price for one property in the development was $461,000 but its actual sale price was $408,500;

another property’s listed price was $480,500, instead of $410,000.

220. Bolden says that KB Home, the Countrywide affiliate, never gave her a

satisfactory answer. Another couple, David and Dolores Contreras, purchased a home in the

same Countrywide-affiliated subdivision and made similar allegations that LandSafe overstated

their property value based on comparisons to properties that were out-of-town, and thus not

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comparable, or inaccurately inflated. The appraisers’ blatant misstatements make the inflated

appraisals easy to identify.

221. Countrywide and its appraisal subsidiary, LandSafe, have also been sued by

Fannie Mae and Freddie Mac investors for damages arising from inflated appraisals for property

underlying mortgage packages sold to both Fannie Mae and Freddie Mac.

222. Falsely overstated appraisals were a systemic problem within Countrywide’s loan

origination process. The overstated appraisals meant that the stated LTV ratios for the Mortgage

Loans underlying Allstate’s Certificates were false and misleading and contained omissions of

material fact, since they were based on inaccurate values which skewed the loan-to-value ratios.

The properties’ actual LTV ratios would have been much higher, since the mortgaged properties’

value was so frequently overstated.

(2) The ratings were a garbage-in, garbage out process further hindered by conflicts of interest and outdated models

223. The supposedly-independent ratings given by the major credit rating agencies

(such as Moody’s and S&P) were based on the loan profiles fed to the agencies by Countrywide.

As previously explained, the evidence that that data was false is overwhelming. As such, the

Defendants essentially pre-determined the ratings by feeding garbage into the ratings system.

224. The rating agencies accepted the garbage data because the process suffered from a

serious conflict of issue problem, which was not disclosed to Allstate even as Countrywide

represented that the ratings would be independent. Typically, the rating agencies were only paid

if the rating is used, with preliminary work done in order to generate goodwill with issuers. This

means arrangers could obtain work from multiple agencies and choose the agency that was

willing to give the highest rating for worst deal structure. This is known as “ratings shopping.”

The agencies were thus conflicted, as the party paying their bills (like Defendants) leveraged

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their ability to go elsewhere to secure a higher credit rating. The Defendants did not disclose that

the agencies were driven by a virulent conflict of interest to issue those ratings using insufficient

data and baseless assumptions. For example, an April 2010 memorandum issued as part of the

Senate’s Permanent Subcommittee on Investigation’s analysis concluded that S&P allowed

“competitive pressures” to affect ratings quality.

225. The agencies also used models that were outdated and thus, contrary to

Defendants’ representations, were not actually designed to assess the true risk presented by the

Certificates. Despite the rapidly-changing mortgage market (such as the rise of subprime loans,

exotic loan structures, no- and low-documentation origination programs, etc.) the rating agencies

did not materially update their models until late 2007, when both S&P and Moody’s belatedly

announced they were revising their methodologies to deal with “loosened” and “aggressive”

underwriting practices.

226. The President’s Working Group’s policy statement concluded that “faulty

assumptions” caused the need to eventually downgrade significant RMBS, and specifically

highlighted reliance “on assumptions about correlations between ABS that underestimated the

degree of linkages between underlying securities.”

227. The Congressional Research Service concluded that “the models failed to

understand the likelihood of falling house prices, attached the wrong weights to the effect of

falling house prices on loan default rates; and miscalculated the interdependence among loan

defaults.” It blamed the fact that “the models did not contain adequate performance data from

subprime, interest only, option ARM, and other high risk mortgages that had come to dominate

the housing market.”

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228. The government’s April 2010 ratings report also found that S&P “used credit

rating models with data that was inadequate,” and that “[b]y 2006, knew their ratings of [RMBS

and CDOs] were inaccurate,” and “despite record profits from 2004 to 2007 . . . failed to assign

sufficient resources to adequately rate new products and test the accuracy of existing ratings.”

229. For instance, S&P developed better models but chose not to use them because it

would harm its bottom line. According to Congressional testimony of former S&P Managing

Director Frank Raiter, S&P’s 1999 model used data from 900,000 loans, but S&P later

developed an alternative using 2,500,000 loans, and another using 10,000,000. He testified these

more broadly-based models would have alerted investors about problems much sooner than the

collapse suddenly did. He also claimed that S&P chose not to use them because they cost more,

yet S&P did not think they would increase its market share.

230. S&P’s own documents support Mr. Raiter’s testimony that market share concerns,

rather than a concern for ratings accuracy, drove S&P’s modeling decisions. In a May 25, 2004

S&P email entitled “competition with Moody’s,” one employee lamented that a “huge” deal was

lost because of “criteria issues” that threatened to “have an impact in the future deals” if not

addressed. The S&P employee found that S&P’s requirements were “at least 10% higher” than

Moody’s, and thus the only way to compete was to have a “paradigm shift in thinking.”

231. In a March 2005 S&P email exchange, one S&P employee wrote: “I’m puzzled.

When we first reviewed 6.0 results **a year ago** we saw the sub-prime and Alt-A numbers

going up and that was a major point of contention . . . . Version 6.0 could’ve been released

months ago and resources assigned elsewhere if we didn’t have to massage the sub-prime and

Alt-A numbers to preserve market share.” In May 2007, an S&P employee discussing a

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modeling change stated that he “would recommend we do something,” before adding the

qualifier “unless we have too many deals in US where this could hurt.”

232. There is similar evidence that Moody’s was driven by conflicts of interest to

rubber-stamp ratings despite the garbage data being fed to them by Defendants and despite the

outdated models being used. Moody’s CEO, during a September 10, 2007 town-hall meeting,

admitted that “It was a slippery slope. What happened in ‘04 and ‘05 with respect to

subordinated tranches is that our competition, Fitch and S&P, went nuts. Everything was

investment grade.”

233. In an October 21, 2007 Moody’s document forwarded by its CEO, Moody’s

admitted internally that: “[T]he market share pressure persists . . . . Moody’s has erected

safeguards . . . . This does NOT solve the problem though . . . . Analysts and [managing

directors] are continually ‘pitched’ by bankers, issuers, investors – all with reasonable arguments

– whose views can color credit judgment, sometimes improving it, other times degrading it (we

‘drink the koolaid’).”

234. During his Congressional testimony, former Moody’s Managing Director Jerome

Fans admitted that “the deterioration in standards was palpable – as I said, evidenced – first arose

at least in 2006 as things were slipping, and the analysts or the managers for whatever reason

turned a blind eye to this, did not update their models or their thinking, and you know allowed

this to go.”

(3) Government investigations and other lawsuits

235. As a result of the facts about Countrywide’s practices coming to light,

Countrywide Financial’s market capitalization declined by more than 90% in just one year,

deteriorating by $25 billion in 2008. Bank of America subsequently acquired Countrywide

Financial and its subsidiaries for just 27% of Countrywide’s stated $15.3 billion book value.

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236. The scope and breadth of Countrywide’s unlawful conduct have prompted a

substantial number of public and private inquiries, investigations and actions. The actions are

based, in part, upon misconduct by Countrywide and its personnel that was inconsistent with

Countrywide’s representations to investors. Federal and state governments have alleged that

Countrywide’s Offering Documents contained materially untrue and misleading statements and

omissions of material facts. For example, FBI investigators have found that Countrywide’s loan

documents often contained dubious or erroneous information about its borrowers.

237. The Department of Justice and the SEC investigated potential securities fraud by

Countrywide and its personnel in the securitizations of mortgage loans and offerings of

mortgage-backed securities in the secondary market, allegations that false and misleading

disclosures were made to influence the stock trading price, and allegations of insider trading by

Mozilo and Sambol. On June 4, 2009, the SEC filed a complaint in the U.S. District Court for

the Central District of California, levying civil fraud charges against Mozilo for insider trading,

and against Sambol and Sieracki for failing to tell the truth about Countrywide’s relaxed lending

standards in its 2006 Annual Report. See SEC v. Mozilo, CV 09-03994 (VBF). As discussed

above, on September 16, 2010, the District Court rejected the defendants’ motions for summary

judgment. According to news reports, a month later all three defendants settled with the SEC,

for a combined total of over $28 million in penalties. Allstate did not be come aware (nor in the

exercise of reasonable diligence could have discovered) most of the e-mails and other documents

alleged in this Complaint until the SEC published these documents in its civil enforcement

proceeding brought against Mozilo and Sambol.

238. A number of states and municipalities have also investigated Countrywide’s

lending practices, and several have commenced actions against Countrywide. Bank of America

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paid to restructure certain of Countrywide’s home loans, approving and facilitating the

settlement of a predatory-lending lawsuit brought by state attorneys general by agreeing to

modify up to 390,000 Countrywide loans, an agreement valued at up to $8.4 billion.

239. Countrywide has been the target of multiple state and federal investigations and

proceedings regarding its lending, underwriting, and appraisal practices for mortgage loans.

240. In addition, the Wall Street Journal reported on December 5, 2009 that Fannie

Mae and Freddie Mac are requiring Bank of America – Countrywide’s successor – and other

mortgage lenders to buy back nearly $3 billion in souring loans that Fannie Mae and Freddie

Mac purchased from those lenders. The investors are invoking putback clauses in their contracts

which require the repurchase of defectively underwritten loans, including loans that exaggerate

borrowers’ incomes or misstate their intentions to live in the mortgaged properties. Fannie Mae

explained that putting back improper loans asserts “accountability.”

241. Countrywide has also been sued dozens of times by private individuals for the

Company’s lending practices. Plaintiffs allege that Countrywide has broken laws ranging from

federal securities laws to state consumer-protection laws. In addition, a number of private

actions have been commenced against Countrywide, including shareholder actions challenging

the accuracy and completeness of Countrywide’s statements in and around the period between

2004 and 2007. These actions allege that Countrywide failed to disclose the expansion of its

origination of subprime and other higher-risk mortgage loans. In addition, consumer actions

have been filed challenging Countrywide’s lending practices. One shareholder action, In re

Countrywide Financial Corp. Securities Litigation, cv 07-05295 (C.D. Cal), recently settled,

with Countrywide Financial agreeing to pay $600 million to the plaintiffs.

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(4) Studies of the percent of loans approved on a fully-documented basis

242. The Federal Home Loan Bank of Indianapolis studied the information it was able

to obtain from loan servicing companies regarding the loans underlying many of its investments.

It found that Countrywide had overstated by 18% the number of underlying loans that were

underwritten pursuant to the much lower risk, full-documentation procedures.

243. This study included a Countrywide transaction that occurred at the same time as

Allstate’s Certificates were issued, included loans being originated at the same time as the

Mortgage Loans underlying Allstate’s Certificates, and was done pursuant to the same purported

underwriting standards. Given this overlap and the other evidence discussed herein that

Countrywide was systematically abandoning all underwriting standards and controls, this is

strong evidence the same type of overstatements occurred in Allstate’s Offerings as well. On

information and belief, the Offering Materials at issue here similarly materially overstated the

percent of underlying loans that were based on a fully-documented basis, and thus materially

understated the risk associated with Allstate’s Certificates.

(5) Servicing failures

244. On information and belief, Countrywide Home Loans Servicing and Countrywide

Home Loans have also failed to service the Mortgage Loans consistent with industry standards,

including, for example, by refusing to accept partial payments from borrowers. Countrywide

also prematurely charged off loans to the direct detriment of Allstate by charging off loans where

the borrower was able to, and in fact did, make payments after the date of the charge-off.

245. Countrywide’s servicing of its mortgage loans lagged behind the standards of the

industry, contrary to its representations. Countrywide failed to allocate sufficient resources to

service and administer the loans, such as personnel to address customer inquiries and to conduct

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follow-up efforts with delinquent borrowers. Countrywide has also provided inadequate

resources for work-out plans.

246. These failures were exacerbated by the Company’s break-neck origination of

loans in disregard of its own underwriting guidelines, which led to an enormous increase in

delinquencies, defaults, foreclosures, bankruptcies, litigation, and other proceedings, which place

greater demands on Countrywide Home Loans Servicing and Countrywide Home Loans (in the

case of CWHEL 2005-B) in their capacity as Master Servicer.

247. Countrywide also provided poor customer service to its borrowers, often proving

unhelpful in resolving customers’ problems and frequently acting against its customers’ interests

by steering borrowers into repayment plans that worsened their financial problems and increased

their indebtedness to the Company. When borrowers contacted Countrywide seeking help to

avoid foreclosure proceedings, Countrywide frequently offered repayment plans that actually

increased the borrowers’ monthly mortgage payments, which thereby further increased the risk

of default and foreclosure.

248. Customer-service representatives at Countrywide’s Call Center were required to

complete service calls in three minutes or less, and to complete as many as 65 to 85 calls in a

day, which did not give the Company’s employees adequate time to fully explain the details of

borrowers’ loans to those borrowers. Inadequate information provided to borrowers increased

the likelihood of delinquency, default, and other problems with the Mortgage Loans because

borrowers were not fully apprised of the payment terms and other material aspects of their loans.

249. Customer-service representatives received financial incentives, in the form of

bonuses, for exceeding volume quotas and for successfully recommending that existing

Countrywide customers refinance their loans by taking out new Countrywide mortgages, even

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when doing so was not in borrowers’ best interests. For example, the Illinois Attorney General’s

complaint describes a widower whom Countrywide refinanced into an adjustable-rate loan; when

the interest rate reset, her interest rate ballooned and rendered her mortgage unaffordable on her

fixed income.

250. The Illinois Attorney General describes a borrower whose monthly mortgage

payment was $1600. She fell behind on payments and called Countrywide to ask for help.

Countrywide Home Loans Servicing ended up placing her in a repayment plan that increased her

monthly mortgage bill to $2500, which included her original payment plus money toward past-

due payments and fees. She continued to be unable to pay her mortgage. After six months of

working with Countrywide, the company demanded a payment of over $5000 by the borrower

before it would consider her request for loan modification.

251. Even when Countrywide Home Loans Servicing comes up with loan-modification

plans, it often fails to discuss the plan with the borrower to confirm if it affordable or fails to

send timely documentation to the borrower regarding details of the plan. A borrower who called

Countrywide Home Loans Servicing on five separate occasions was only told on the fifth call

that Countrywide was modifying her loan, but it failed to discuss whether that would be

affordable for her. Countrywide Home Loans Servicing should have known that the loan was

not affordable, based on information send by the borrower.

252. Borrowers report having difficulty reaching Countrywide Home Loans Servicing

to discuss their mortgages. For example, a woman told the Illinois Attorney General that when

she called Countrywide to discuss 10 months of payments that she had made and which did not

appear on her financial statements, she was put on hold and transferred from person to person,

never obtaining a satisfactory answer regarding her account.

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253. As foreclosures have increased across the country, complaints have mounted that

Countrywide and other mortgage servicers were abusing their authority by improperly claiming

title to properties and overcharging borrowers. In a number of lawsuits, judges have halted

Countrywide foreclosures because they were based on errors or wrongdoing by Countrywide in

servicing the borrowers’ loans.

254. For example, in the case of Connie and David Prince, a couple from Iron City,

Tennessee with a Countrywide mortgage, the Company failed to credit their account with

mortgage payments and foreclosed on the property based on alleged failures to pay. In court,

Countrywide claimed that the failure to credit the Princes’ account was “inadvertent.”

Countrywide has since agreed to reverse the foreclosure and reinstate the couple’s mortgage.

The couple tried to explain the accounting problems to Countrywide prior to the foreclosure but

was unsuccessful. Mr. Prince remarked that “Our lives have been destroyed by this and it wasn’t

our mistake.”

255. Judges have criticized Countrywide for its flawed servicing practices. In one

case, a federal judge in Houston told Countrywide to “mend” its “broken practices” with regard

to servicing. The United States Trustee, which oversees the integrity of bankruptcy courts, has

sued Countrywide, contending that its tactics represent an abuse of the bankruptcy system.

256. Hundreds of Countrywide customers have posted stories on Internet websites such

as the consumer-protection website ConsumerAffairs.com, at http://www.consumeraffairs.com/

finance/countrywide_mortgage.html (last accessed December 3, 2010), describing their personal

experiences with Countrywide’s neglectful servicing practices. The website alone lists hundreds

of testimonials by borrowers who complain of their dealings with the Company’s unhelpful,

unprofessional, and harassing bureaucracy. The stories describe false allegations of overdue

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payments and resulting foreclosure notices by the Company, dozens of phone calls to resolve

simple problems, uninformed employees, and mishandled records.

V. COUNTRYWIDE KNEW ITS REPRESENTATIONS WERE FALSE

257. The allegations below are made in support of Plaintiffs’ 1934 Act and common-

law fraud claims, not in support of Plaintiffs’ 1933 Act claims, which are based solely on strict

liability and negligence.

258. The same evidence discussed above not only shows that the representations were

untrue, but that the Countrywide Defendants knew it was falsely representing the underlying

process and the risk profiles behind the Mortgage Loans. For instance:

• The large discrepancies in basic information such as owner occupancy, LTV, and CLTV statistics, detailed above and in the Exhibits, evidences a systemic underwriting failure that Countrywide could not possibly have been ignorant of given that it controlled the entire underwriting and securitization process.

• Countrywide’s post-mortem admits that it did not “heed the warnings,” and that “lots of experienced people were uncomfortable.”

• Countrywide’s CEO’s emails show that he saw “errors of both judgment and protocol,” “massive disregard for the guidelines,” and “serious lack of compliance within our origination system.”

• Countrywide’s internal audits discovered that a staggering percentage of loans were being approved as “exceptions.” For instance, one “particularly alarming” audit found that 23% of subprime loans were at the time being processed as exceptions, and another found that 52% of the subprime division’s 100% financings were done with exceptions.

• The amount of loans having to be approved as “exceptions” was seen within Countrywide as “speak[ing] towards our inability to adequately impose and monitor controls.”

• Other correspondence and testimony confirms the “exceptions” were just a tool being used to “keep pace” as to implement the “matching” strategy.

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• Countrywide’s credit officers viewed the “matching” strategy as “ceding” Countrywide’s policies to the market. Another saw Countrywide’s underwriting policies as “theoretical,” and saw it as indefensible that Countrywide continued to use “salability” as the sole criterion for approval.

• Countrywide’s risk officers wrote that the company “basically continued to act as though they never received” policies the credit officers circulated, and that the risk officers were “frustrat[ed]” to have their judgment “overridden with whining and escalation.”

• Countrywide’s documents refer to “several recent examples” where products were approved despite explicit rejections by the company’s credit risk department.

• According to former employees, borrowers who could not quality for a loan were steered into low-documentation products, then coached on how to falsify the application to ensure it would be approved.

• According to former borrowers, in some instances Countrywide’s loan officers would even fill out the required misrepresentations without the borrowers knowledge.

• Countrywide’s internal reviews found at one point that 40% of the reduced-documentation loans had income overstatements.

• Countrywide’s “focus group” studies found that borrower income was being overstated.

259. That the Countrywide Defendants knew their representations were fraudulent is

further supported by additional evidence from Countrywide’s own documents and employees.

For instance, Countrywide’s post-mortem analysis, discussed above in Section IV, also shows an

admission that the company knew at the time what it was doing was wrong, but it proceeded

anyway:

• “We did not fully heed the warnings of our credit models. Delinquencies were increasing, and models predicted worse to come.”

• “Early indicators of credit risk exposure existed. Internal control systems highlighted many of the risks that eventually transpired.”

• “Lots of experienced people were uncomfortable with underwriting guidelines. Going forward, we need to rely on our experience and instinct

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when business practices don’t make sense. In particular, stated income and high LTV was highly counter-intuitive.”

• “This crisis will stay in our minds for a generation. We will probably not see a return to this type of irrational behavior for a long time to come.”

(Emphasis added).

260. The fact that the above concerns mirror concerns the Credit Risk Committee

raised long before Countrywide’s problems became public further shows that Countrywide’s

admissions were not mere hindsight. In an internal document highlighting “areas of concern,”

alternatively known as a “wall of worries,” one of the Credit Risk Committee’s “areas of

concern” was Countrywide’s “loan quality,” including “increased fraud,” “exception

underwriting,” “guideline drift,” “attribute deterioration,” and “appraisal quality.” This

document was generated within Countrywide at the time many of the Mortgage Loans at issue

here were being generated and securitized in Allstate’s Offerings.

261. As noted above, John McMurray, Countrywide’s then-Chief Risk Officer, gave

repeated, explicit, and alarming warnings to Sambol, Mozilo, and others about the financial risks

of Countrywide’s origination practices, and advocated for stricter origination guidelines.

McMurray’s testimony also identified his own notes from November 3, 2006, wherein

McMurray indicated that he had discussed with Sambol that McMurray was concerned that he

would be personally blamed for products that he “never advocated and often recommended

against.” (Emphasis added). His testimony also indicates he raised “concerns about

inadequate controls, infrastructure, etc.” (Emphasis added). His notes also indicated that he

discussed with Sambol concerns about “the company’s risk philosophy. Discussed ‘can’t say no’

culture, pressure from matching and no brokering policies.”

262. The testimony of another risk manager, Ingerslev, also confirms that Countrywide

was made aware internally of the risks its shoddy procedures were creating:

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In an organization like Countrywide, sales, the strategy of the company was predominantly, you know, a sales-oriented one because of our history as a mortgage banker and, you know, being able to sell off a lot of credit risk, that was one instant, one probability factor that contributes to the culture that we have. So that – and ultimately, you know, disagreements or ties were broken, you know, to the – you know, the side of erring on, well, we don’t want to lose volume, we want to keep up the volume and keep up our market share. That was a strategy at the company level.

But, you know, John [McMurray] and I and those of us in credit still felt like it was our obligation to make sure that there was perspective, and we were doing it with eyes wide open. In other words, in that environment, there was conflict. Some of it you’d expect, and some of it went beyond what you would expect and was tough.

263. He said it was “part of the culture” to have “pressure to [] move things along and

say yes to things, and you felt that pressure.” He also testified that he thought the company’s

guidelines had gone “too far” given the “additional layers of risk” in the product mix and

because of changing interest rates. He testified that he was involved in a “constant dialogue”

regarding requests to expand even further, but that “I’m sure I said on more than one occasion,

you’ve got to stop here.”

264. In a May 26, 2006 email, Sieracki wrote: “They’re finally forced to pay me good

money and I will try to ride that train as long as I can. The big issue is risk. Sarbanes-Oxley can

result in me going to jail or losing my net worth for things I don’t even know. Guilty verdicts

were handed down in Enron today.” (Emphasis added).

265. According to a former employee, Mark Zachary, whose other statements are

discussed above, Countrywide’s loan origination was plagued by “outright misrepresent[ation of]

loans to the secondary markets, to end investors, and to buyers.” The Company’s mentality, he

said, was “what do we do to get one more deal done. It doesn’t matter how you get there . . . .”

Zachary confirmed that he was driven to issue mortgages even though he knew he was setting up

the borrower to eventually lose their home.

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266. Zachary also recounts an October 25, 2006 e-mail in which a Senior Vice

President and Divisional Operations Manager for Countrywide KB Home Loans sanctioned the

falsification of information. In the e-mail, Zachary posed to the manager a situation in which a

loan officer confessed that a potential borrower did not have a job in the local area, when that is a

requirement of the mortgage for which the borrower was applying. Even more drastically,

Zachary wondered what would happen if the loan officer mentioned that the borrower was

applying for a stated-income loan because he was unemployed. Zachary asked for confirmation

that in those circumstances, when there was evidence that the borrower and/or loan officer were

falsifying the borrower’s information, the Company would reject the loan. Shockingly, the

senior executive wrote back that “I wouldn’t deny the [loan] because I didn’t hear anything. I

would definitely tell the [loan officer] to shut up or shoot him!”

267. Zachary brought his concerns regarding no-doc loans (discussed further above) to

the attention of Countrywide Employee Relations and Risk Management officials in 2006 and

early 2007, but he was ignored. He also refused to unconditionally approve borrowers that did

not meet Countrywide’s stated guidelines, at which point he was taken out of the approval

process and the loans were approved anyway, by his supervisor.

268. That Countrywide knew the loans it was placing into Allstate’s pools were failing

basic underwriting standards is further evidenced by the fact that the investment bank’s due

diligence reports, which it should have received, showed that large number of loans it was

originating was failing basic tests but were being included in securitizations anyway.

269. Investment banks performed due diligence on mortgages before purchasing them

from originators. Prior to a loan auction, originators provided investment banks with bid sheets,

which, among other things, dictated: (1) the percentage of the pool on which the investment

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banks would be permitted to conduct due diligence (e.g., 25%); and (2) the number of loans the

investment banks could “kick out” due to borrower deficiencies, payment delinquencies, early

payment defaults, lack of documentation and other problems. Prior to bid submission,

originators also sent the investment banks spreadsheets known as loan tapes, which contained

various loan data. The investment banks were supposed to “crack” the loan tapes, analyze them,

and determine what prices to bid for the loan pools. Once this “bid package” analysis was

complete, the investment banks submitted their bids.

270. If the originator accepted a bid, the investment bank typically had a short period

of time prior to the settlement date to conduct due diligence on the loans. The investment banks

sometimes hired third-party due diligence firms such as Clayton Holdings, Inc. (“Clayton”) or

the Bohan Group (“Bohan”) to conduct this review under their supervision.

271. Due to strong demand, originators such as Countrywide gained bargaining power

over investment banks seeking to purchase mortgages and sponsor securitizations. One way

originators exercised this bargaining power was to insist that investment banks limit their due

diligence to smaller percentages of loans prior to purchase. If an investment bank chose to kick

out a large number of loans from a pool (e.g., because the loans failed to conform to the

mortgage originator’s guidelines or did not contain adequate documentation) it risked being

excluded from future loan purchases. As a result, investment banks performed increasingly

cursory due diligence on the loans they securitized.

272. On information and belief, Countrywide knew of the red flags raised by the due

diligence conducted by Clayton and Bohan. As an originator, Countrywide was aware of the

pressure on investment banks to scale back their due diligence and limit the number of loans

kicked out of a securitization. In addition, Countrywide itself retained third-party due diligence

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firms such as Clayton to perform due diligence with respect to the securitizations it sponsored.

According to a confidential witness referenced by the plaintiff in Federal Home Loan Bank of

Chicago v. Banc of America Funding Corporation et al., No. 10CH450B3 (Oct. 15, 2010

complaint), sponsors of deals that Clayton was reviewing would even have their own employees

on site to review the loans that were being considered for inclusion in a mortgage pool.

273. Congressional testimony by Clayton’s Vice President Vicki Beal indicates that the

investment banks determined the type and scope of review performed on the loan pools. Yet,

rather than directing the firms to conduct thorough reviews that were most likely to identify

defective loans, the investment banks pressured the loan reviewers to disregard problematic

loans through exceptions and offsets that did not satisfy the applicable underwriting guidelines.

274. Further compounding the problems, Clayton employees were instructed to review

fewer loans in the loan pools as the securitization market grew. According to Beal’s 2010

testimony, as the securitization markets grew even more frenzied Clayton’s clients were only

asking for samples of 5% of the loan pools. Showing how careless underwriters were when

other people’s money was at stake, according to the Los Angeles Times, Bohan President Mark

Hughes contrasted these low figures with the 50% to 100% sample sizes consistently seen where

loan buyers were keeping the loans for themselves.

275. As reported by the Los Angeles Times, Clayton and Bohan employees (including

eight former loan reviewers who were cited in the article) “raised plenty of red flags about flaws

so serious that mortgages should have been rejected outright – such as borrowers’ incomes that

seemed inflated or documents that looked fake – but the problems were glossed over, ignored, or

stricken from reports.” Ironically, while the investment banks pressured third-party reviewers to

make exceptions for defective loans, they often utilized information about bad loans to negotiate

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a lower price for the pool of loans from the seller (i.e. originator). Indeed, according to

September 2010 testimony before the FCIC by Clayton’s former president, D. Keith Johnson,

this was one of the primary purposes of the due diligence review.

276. Clayton provided the FCIC with documents showing the defect and waiver rates

for some of the investment banks which had retained Clayton to conduct loan pool due diligence.

These documents reveal that from the fourth quarter of 2006 to the first quarter of 2007, 23% of

the mortgages Countrywide submitted were rejected. Of the mortgages that Clayton rejected,

12% were subsequently waived by Countrywide and included in securitizations like the ones in

which Allstate invested.

277. Clayton also produced a report containing the rejection and waiver rates for loans

originated by Countrywide. Those rates are as follows:

1Q 2006 2Q 2006 3Q 2006 4Q 2006 1 Q 2007 Rejection rate 24% 23% 13% 14% 16% Waiver rate 8% 14% 16% 11% 14%

278. Nevertheless, Countrywide never disclosed to Allstate that the due diligence

conducted by Clayton and Bohan had informed their clients that a substantial number of the

loans in the pools backing Countrywide’s securities were defective, that Countrywide had

waived the defects as to a substantial number of the loans, or that the underwriters were using

this information to negotiate a lower price for the loan pools.

279. Relying on only a part of the evidence referred to in this Complaint, the District

Court that rejected Mozilo, Sambol, and Sieracki’s motions for summary judgment in the SEC

action found a triable issue of fact as to the question of scienter:

Here, the SEC has presented evidence from which a reasonable jury could conclude that Defendants possessed the requisite scienter. For example, the SEC has demonstrated that Defendants were aware that Countrywide routinely ignored its underwriting guidelines and that Defendants understood the accompanying

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risks . . . . The SEC has also presented evidence that Sambol was aware that Countrywide’s matching strategy resulted in Countrywide’s composite guidelines being the most aggressive guidelines in the industry . . . .

Moreover, in addition to demonstrating that Defendants were aware of the facts which made their statements misleading, the SEC has presented evidence that Sambol and Sieracki knew that Countrywide’s Chief Risk Officer John McMurray firmly believed that Countrywide should include greater risk disclosure in its SEC filings . . . .

Accordingly, the SEC’s evidence is sufficient to raise a genuine issue of material fact with respect to Defendants’ scienter, and summary judgment is inappropriate.

S.E.C. v. Mozilo, 2010 WL 3656068, at *16-20 (emphasis added).

280. Other courts have similarly found that allegations similar to those made here

relating to the activities of Countrywide and its executives present a “cogent and compelling

inference of scienter.” See In re Countrywide, 588 F. Supp. 2d 1132, 1192-94 (C.D. Cal. 2008).

VI. ALLSTATE’S DETRIMENTAL RELIANCE AND DAMAGES

281. In making the investments, Allstate relied upon Countrywide’s representations

and assurances regarding the quality of the mortgage collateral underlying the Certificates,

including the quality of Countrywide’s underwriting process whereby it generated the underlying

loans. Allstate received, reviewed, and relied upon the Offering Materials, which described in

detail the Mortgage Loans underlying each offering.

282. In purchasing the Certificates, Allstate justifiably relied on Defendants’ false

representations and omissions of material fact detailed above, including the misstatements and

omissions in the Offering Materials.

283. But for the misrepresentations and omissions in the Offering Materials, Allstate

would not have purchased or acquired the Certificates, because those representations and

omissions were material to its decision to acquire the Certificates, as described in Section III

above.

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284. The false and misleading statements of material facts and omissions of material

facts in the Offering Materials directly caused Allstate damage, because the Certificates were in

fact far riskier than Countrywide had described them to be. The loans underlying the Certificates

experienced default and delinquency at very high rates due to Countrywide’s abandonment of its

underwriting guidelines.

285. Allstate has incurred substantial losses in market value and lost principal and

interest payments, due to the poor quality of the collateral underlying the Certificates. The

income and principal payments to which Allstate is entitled have been lower than Allstate

expected and lower than the payments to which Allstate is entitled under the “waterfall”

provisions of the securitizations.

286. The disclosure of irregularities in Countrywide’s underwriting practices and

increased risk regarding future cash flow has also led to a substantial decline in market value of

the Certificates. Allstate purchased the Certificates not only for their income stream, but also

with an expectation of possible reselling the Certificates on the secondary market. Allstate thus

viewed market value as a critical aspect of the Certificates it purchased. Allstate incurred

substantial losses on the Certificates due to a drastic decline in market value attributable to

Countrywide’s misrepresentations which, when disclosed, revealed that the Mortgage Loans

likely had a substantially higher risk profile than investors (including Allstate) were led to

believe.

287. Allstate’s losses on the Certificates have been much greater than they would have

been if the loans were as Countrywide described them to be. For example, the fact that the loans

were not applied to owner-occupied properties at their claimed rate made them more prone to

default. Owners who do not occupy their properties are more likely to default on their loans,

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which made the Certificates poorer investments, accelerated the Certificates decline in value, and

greatly worsened Allstate’s losses.

288. The drastic and rapid loss in value of Allstate’s Certificates was primarily and

proximately caused by Countrywide’s issuance of loans to borrowers who could not afford them,

in contravention of the prudent underwriting guidelines described in the Offering Materials.

These rates of delinquency and default were much higher than expected for securitizations

supported by collateral fitting Countrywide’s representations, and much higher than they would

have been if the Mortgage Loans had been properly underwritten. The drastic increases in

delinquency and default on the Mortgage Loans were not attributable to the recent decline in the

American housing market, but rather due to Countrywide’s wrongdoing.

VII. OTHER MATTERS

A. Defendants’ Liability as Control Persons

289. Primary Violators. The primary violators in this action are the Depositors,

Countrywide Home Loans, and Countrywide Securities.

290. The Depositors issued the Certificates. The Depositors purchased the Mortgage

Loans that comprised the trust assets, typically from Countrywide Home Loans and other

Countrywide subsidiaries. As stated in the CWHEQ 2005-E Offering Materials, “Countrywide

Home Loans, Inc. will be the seller of a portion of the Mortgage Loans. The remainder of the

mortgage loans will be sold directly to the depositor by one or more special purpose entities that

were established by Countrywide Financial Corporation which, in turn acquired those mortgage

loans directly from Countrywide Home Loans, Inc.” After the Depositors acquired the Mortgage

Loans and created the collateral pools, the Depositors transferred the pools to the Trusts to issue

the Certificates.

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291. The Trusts had no discretion or control over the mortgages in the pool. The

Trusts had no autonomy or assets of their own, but were mere agents of the Depositors created

by Countrywide Financial for the sole purposes of holding the pools of Mortgage Loans

assembled by the Depositors and issuing the Certificates to Countrywide Securities for sale to the

investors.

292. Countrywide Securities and Countrywide Home Loans, Inc. sold the Certificates

to Allstate, and also qualify as sellers.

293. Control Person: Countrywide Financial. Countrywide Financial operated its

consolidated subsidiaries as a collective enterprise, making significant strategic decisions for its

subsidiaries, monitoring enterprise-wide risk, and maximizing profit for Countrywide Financial’s

executives and shareholders. As reported in Countrywide Financial’s 2003 Form 10-K, although

mortgage banking remained Countrywide Financial’s “core business,” it had expanded

operations in recent years “to capitalize on meaningful opportunities to leverage our core

Mortgage Banking business and to provide sources of earnings that are less cyclical than the

mortgage banking business.”1 In other words, in conjunction with its goal of prioritizing the

origination of loans regardless of the risk of default, Countrywide developed its own “in-house”

subsidiaries to facilitate its ability to package and sell these risky products.

294. Countrywide Financial managed Countrywide’s enterprise-wide risks, strategic

direction, and business operations through executive committees. These committees included

the Executive Strategy Committee, the Corporate Credit Risk Committee, the Corporate

Enterprise Risk Committee, and the Asset/Liability Committee.

1 Throughout the relevant time period, Countrywide Financial filed consolidated Form 10-Ks, providing a

cumulative assessment of the operations of Countrywide Financial and all of its subsidiaries, including the other Countrywide entity Defendants.

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295. The Executive Strategy Committee. Its members included four Officer

Defendants: Mozilo, Sambol, Sieracki, and Kurland. They were responsible for defining and

assessing Countrywide’s enterprise-wide strategic direction and risk. The Committee’s activities

included developing Countrywide Financial’s Corporate Strategic Plan and reviewing the

strategic plans of each of Countrywide Financial’s divisions, to ensure consistency and proper

strategic alignment.

296. The Corporate Credit Risk Committee and The Corporate Enterprise Risk

Committee. These committees interfaced directly with the Credit Committee within

Countrywide Financial’s Board of Directors, assessed the risks to which the Countrywide

enterprise was exposed, and they decided which risks Countrywide Financial should sell or

otherwise mitigate. The Credit Risk group was also responsible for managing fraud prevention

and investigation. Sieracki and Kurland were both members of the Corporate Credit Risk

Committee.

297. The Asset/Liability Committee. This committee was responsible for addressing

market risk for the Countrywide enterprise, across all Countrywide Financial subsidiaries. The

Asset/Liability Committee engaged in extensive modeling for the performance of Countrywide

Financial’s various financial products, and maintained a dedicated Model Validation

Subcommittee for that purpose. Five Officer Defendants—Mozilo, Sambol, Kurland, Sandefur,

and Sieracki—were members of the Asset/Liability Committee, and Sieracki became the acting

Chairman of the committee in February 2006.

298. Through the use of these committees and others, as well as regular

communication with and among its subsidiaries and regular reporting regarding the performance

of divisions across the enterprise, Countrywide Financial maintained a high level of day-to-day

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scrutiny and control over its subsidiaries. Countrywide Financial controlled the guidelines for

loan origination, decided which assets to sell and which to hold for its own investment portfolio

by being advised of the quality of the underwriting and the loans originated, set protocols for

servicing the vast portfolio of loans for which it had retained servicing rights, and approved the

manner in which it sold those loans it elected to securitize.

299. Countrywide Financial also exercised actual day-to-day control over the

Depositors. These Delaware corporations were structured as limited purpose wholly-owned

subsidiaries to acquire mortgage loan collateral from Countrywide Home Loans and transfer the

collateral to the issuing Trusts for sale to investors. The Depositors were shell corporations that

had no assets of their own. They were controlled by Countrywide Financial through its

appointment of Countrywide Financial executives (Sandefur, Sieracki, Kurland, Kripalani, and

Sambol, among others) as their directors and officers. Revenues flowing from the issuance and

sale of the Certificates were passed through to Countrywide Financial.

300. Countrywide Financial also had actual control over the Trusts. Like the

Depositors, the Trusts were shell entities that had no assets of their own or autonomy, but were

mere subsidiaries of the Depositors created for the sole purposes of holding the pools of

mortgage loans assembled by the Depositors, and issuing Certificates based on those mortgage

pools to underwriters, including Countrywide Securities, for sale to the public.

301. Countrywide Financial culpably participated in the violations discussed below. It

oversaw the actions of its subsidiaries and allowed them, including Defendants Countrywide

Home Loans and Countrywide Securities, to engage in underwriting practices that were

inconsistent with the descriptions presented in the Offering Documents; allowed its subsidiaries

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to misrepresent the Mortgage Loans’ characteristics in the Offering Materials; and established

special-purpose financial entities, such as CWABS, to serve as conduits for the Mortgage Loans.

302. Countrywide Financial also participated in creating the Offering Materials and the

Signatories, who were Countrywide Financial employees at the time, signed those Offering

Materials. Other Countrywide Financial employees, including Mozilo and Sambol, were also

culpable participants in Countrywide’s wrongdoing at the time they were employed by

Countrywide Financial, as reflected by the SEC e-mails. Countrywide Financial is also the

parent company of Countrywide Home Loans, Countrywide Securities, and the Depositors.

303. Unlike arms-length securitizations where the loan originator, depositor,

underwriters, and issuers are unrelated third parties, here the transactions among the loan

originator (Countrywide Home Loans), the Depositors (shell companies CWABS, CWHEQ,

CWALT, and CWMBS), the Trusts (all Countrywide special-purpose shell entities), and the

primary underwriter (Countrywide Securities) were not arms-length transactions at all.

Countrywide Financial controlled every aspect of the origination and securitization processes.

304. All of the Mortgage Loans underlying the Certificates were originated by

Countrywide Home Loans or were acquired by Countrywide Home Loans from other lenders.

Countrywide Financial formed the Depositors and the issuing Trusts as special purpose entities

purely to complete the securitizations. Once the loan certificates were acquired by the Trusts,

they were purchased by the underwriters including Countrywide Securities, the primary

underwriter. Countrywide Securities and other underwriters then packaged and sold the

Certificates to Allstate. Countrywide Financial also controlled the manner in which loans in the

securitizations were serviced, both before and after the securitizations’ Certificates were sold to

the public, by using its own servicing division to service the loans.

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305. In sum, through its various committees and officers, Countrywide Financial

maintained a high level of day-to-day scrutiny and control over its subsidiaries, and controlled

the entire process leading to the sale of certificates to Allstate. Countrywide Financial controlled

the guidelines for loan origination, determined which traditional or non-traditional loan products

to offer, set protocols for servicing the mortgage loans it originated or purchased from other

lenders and for which it had servicing rights, approved the manner in which it sold the loans it

elected to securitize, and controlled the disclosures made in connection with those

securitizations.

306. Control Person: Countrywide Capital Markets. Countrywide Capital Markets

exercised a high level of day-to-day control over its subsidiary, Countrywide Securities.

Mandates from Countrywide Financial passed through Kripalani and Countrywide Capital

Markets to Countrywide Securities, and Kripalani, who was the President and CEO of both

Countrywide subsidiaries, ensured that Countrywide Securities followed priorities and practices

established by Countrywide Financial and Countrywide Capital Markets.

307. As the division of the Countrywide enterprise charged with marketing the loans

originated and acquired by Countrywide Home Loans, Countrywide Capital Markets also

exercised control over the Depositors and, through the Depositors, over the Trusts. Along with

Countrywide Financial, Countrywide Capital Markets determined and approved the manner in

which Countrywide Securities and the Trusts selected and sold the securitized loans in the

Certificate Offerings, and controlled the disclosures made in connection with each securitization.

308. Control Person: Mozilo. As set forth in paragraph 19, Mozilo had numerous

positions and roles within Countrywide.

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309. Mozilo had the power to control and influence, and did in fact control and

influence, all of the business operations of Countrywide Financial and its subsidiaries (including

Countrywide Securities and the Trusts). Mozilo had the power to control and influence, and did

control and influence, Countrywide Financial and Countrywide Home Loans. Mozilo also had

the power to control and influence, and did control and influence, primary violator Countrywide

Securities, a wholly-owned Countrywide Financial subsidiary.

310. Mozilo directly supervised Sambol, who was the direct supervisor of Kripalani

during Kripalani’s tenure as President, Chief Executive Officer, and Managing Director of

Countrywide Securities. Kripalani provided Sambol with regular business updates regarding

Countrywide Securities, and Sambol shared and discussed this information with Mozilo. As

Sambol’s supervisor, Mozilo had the power to control and did control Countrywide Securities.

311. Mozilo also exercised his control and influence through senior management

meetings. For example, Countrywide Financial’s management held monthly “Business Review”

meetings attended by Mozilo and other senior executives. During these meetings, the operations

and performance of each Countrywide entity (including Countrywide Securities and the Trusts)

were evaluated and discussed in great detail. Mozilo and the rest of the senior management team

set the course for Countrywide Financial’s various businesses including the business of

Countrywide Securities.

312. In making numerous statements to the public, Mozilo portrayed himself as the

public face of Countrywide Financial and conveyed that he was speaking on behalf of

Countrywide Financial and all of its subsidiaries (including Countrywide Securities and the

Trusts). Additionally, Mozilo exercised his control and influence over Countrywide Financial

and other Countrywide entities by signing Countrywide Financial documents filed with the SEC.

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These documents include Countrywide Financial’s Form 10-Ks for the years 2003, 2004, 2005,

and 2006. Many of Mozilo’s statements were false and misleading for the same reason the

representations at issue in this action were false and misleading.

313. Mozilo also controlled and influenced Countrywide Financial and its subsidiaries

(including Countrywide Securities and the Trusts) through his membership on several

Countrywide Financial management and Board of Directors committees. Mozilo was a member

of at least the following Countrywide Financial committees: (1) Executive Strategy Committee;

(2) Finance Committee; and (3) Credit Committee. Through his committee and Board

membership, Mozilo exercised his authority as a key member of Countrywide’s decision-making

team.

314. Through his participation in the Countrywide Financial committees and its Board,

Mozilo kept apprised of developments in the business practices of Countrywide Financial and its

subsidiaries (including Countrywide Securities and the Trusts) and exercised control and

influence over Countrywide Financial’s entire business, including the business of Countrywide

Securities and the Trusts.

315. Mozilo’s ability to control and influence Countrywide Financial and its

subsidiaries (including Countrywide Securities and the Trusts) is further evidenced by his central

role in bringing about the transformation of Countrywide Financial from a mortgage company

with conservative underwriting policies into a loan-originating machine that ignored its own

underwriting guidelines and took on increasingly risky loans. Mozilo directed Sambol to initiate

the change in Countrywide’s culture in 2003 and aggressively pushed Countrywide Financial

into numerous new product offerings that changed the risk profile for the loans Countrywide

issued.

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316. Mozilo’s control and influence of Countrywide Financial and its subsidiaries

(including Countrywide Securities and the Trusts) was further evidenced by his close

involvement in the daily management of all aspects of Countrywide Financial’s core operations.

This included approving and overseeing Countrywide Financial’s and Countrywide Home

Loans’ mortgage and loan product offerings – the very same mortgages and loans that were

packaged together for the securitizations at issue in this case.

317. Mozilo exercised his power to control and influence Countrywide Financial and

its subsidiaries (including Countrywide Securities and the Trusts) through his involvement in

developing, modifying, and implementing Countrywide Financial’s guidelines for making and

underwriting new loans and mortgages. Mozilo acknowledged that “I participate every day in

originations myself, and it keeps me apprised of what’s happening.”

318. Mozilo also exercised his control and influence over Countrywide Financial and

its subsidiaries (including Countrywide Securities and the Trusts) through his participation in all

areas of Countrywide’s business, including the activities of Countrywide Securities. For

example, Mozilo exerted influence over various governance responsibilities relating to

Countrywide Financial’s “matching” strategy, including committee supervision and

responsibility for: (1) guideline review and verification; (2) surveillance; (3) pricing and

valuation; (4) monitoring and economic conditions; (5) servicing coordination; and (6)

Countrywide Financial’s subprime market position.

319. Mozilo decided not to intervene with respect to the loans included in the

securitizations at issue even after he became aware that Sambol was directing Countrywide

Securities to securitize pools of loans that featured extreme risk. Mozilo knew the loans of

deteriorating quality were being included and allowed the inclusion of these loans to continue.

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320. It was well known within Countrywide Financial that Mozilo had such extensive

control and influence over the loan and origination practices that he was personally responsible

for instigating breaches in protocol on numerous occasions. For example, Mozilo personally

approved loans that did not meet the applicable guidelines including (1) a loan internally flagged

as “unsalable” because of a debt-to-income ratio of 89%; (2) a loan for a high-profile borrower

“on a reduced doc basis as in the past”; and (3) a loan for that high-profile customer with 100%

loan-to-value financing in July 2004.

321. Mozilo’s control and influence resulted in company-wide weak controls and

procedures with respect to loan approval. Countrywide Financial employees acknowledged that

Mozilo’s practice of personally approving loans for friends without the required paperwork that

violated the stated requirements for obtaining a loan and demonstrated that the requirements did

not need to be followed. Mozilo personally controlled the risky practices about which he and

others at Countrywide lied to the public.

322. Control Person: Sambol. As set forth in paragraphs 20-22 above, Sambol had

numerous positions and roles within Countrywide.

323. By virtue of his senior management positions, Sambol had the power to control

and influence, and did control and influence, Countrywide Financial and Countrywide Home

Loans. Sambol had the power to control and influence, and did control and influence, primary

violator Countrywide Securities, a wholly-owned Countrywide Financial subsidiary.

324. Sambol was the direct supervisor for Kripalani during Kripalani’s tenure as

President, Chief Executive Officer, and Managing Director of Countrywide Securities. Kripalani

provided Sambol with regular business updates regarding Countrywide Securities, and Sambol

provided direction to Kripalani regarding Countrywide Securities’ business. Sambol had the

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power to control and influence, and did control and influence, Countrywide Securities in his role

as Kripalani’s supervisor.

325. In making numerous statements to the public, Sambol portrayed himself as a

public face of Countrywide Financial and its subsidiaries and conveyed that he was speaking on

behalf of Countrywide Financial, Countrywide Home Loans and Countrywide Financial’s other

subsidiaries (including Countrywide Securities). Many of these representations were untrue for

the same reasons the representations at issue in this case were untrue.

326. Sambol also exercised his authority to control and influence Countrywide

Financial and other Countrywide entities by signing numerous materially false and misleading

Countrywide Financial documents filed with the SEC. These documents include Countrywide

Financial’s: (1) Form 10-Q filed on November 7, 2006; (2) Form 10-Q filed on May 9, 2007; (3)

Form 10-Q filed on August 9, 2007; and (4) Form 10-Q filed on November 9, 2007.

327. Sambol’s ability to control and influence Countrywide Financial and its

subsidiaries (including Countrywide Securities and the Trusts) is further evidenced by his central

role in bringing about the change that transformed Countrywide Financial from a mortgage

company with conservative underwriting policies into a loan-originating entity that ignored its

own historical underwriting guidelines and took on increasingly risky loans. Sambol began to

change Countrywide’s culture in 2003 and aggressively pushed Countrywide Financial into

numerous new product offerings that changed the risk profile of the loans Countrywide issued.

328. Sambol’s ability to control and influence Countrywide Financial and its

subsidiaries (including Countrywide Securities and the Trusts) was further evidenced by his

close involvement in the daily management of Countrywide’s operations. This included his

creating, approving, and overseeing Countrywide Financial’s mortgage and loan product

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offerings through its subsidiary Countrywide Home Loans – including loans that were packaged

together for the securitizations at issue in this case.

329. Sambol had the power to control and influence, and did control and influence,

Countrywide Financial, Countrywide Home Loans, and Countrywide Financial’s other

subsidiaries (including Countrywide Securities and the Trusts) through his heavy involvement

with developing, modifying, and implementing guidelines for making and underwriting new

loans and mortgages. Others within Countrywide routinely acknowledged that Sambol had the

ultimate approval power for relaxing guideline requirements for issuing new loans and

implementing any Countrywide programs relating to exceptions processes. Sambol created the

Exception Processing System, which was a computer system designed to approve exception

loans routinely, even though they did not even satisfy the relaxed underwriting criteria. Sambol

also was responsible for changing FICO cut-offs under Countrywide’s underwriting guidelines.

330. Sambol had the power to control and influence, and did control and influence,

Countrywide Financial and its subsidiaries (including Countrywide Securities and the Trusts)

through his membership on several Countrywide Financial management and Board of Directors

committees. Sambol was a member of at least the following Countrywide Financial committees:

(1) Executive Strategy Committee; (2) Asset/Liability Committee; (3) Finance Committee; (4)

Audit and Ethics Committee; and (5) Committee to Set Loan Loss Allowance. Through his

committee and Board membership, Sambol participated in Countrywide’s decision-making team.

331. Sambol’s participation in the Countrywide Financial committees and the Board

also kept him apprised of developments in the business practices of Countrywide Financial and

its subsidiaries (including Countrywide Securities and the Trusts) and afforded him further

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control and influence over Countrywide Financial’s entire business, including the business of

Countrywide Securities and other Countrywide subsidiaries.

332. Sambol exercised his control and influence on numerous occasions. For example,

Sambol mandated a series of changes to the subprime mortgage business at Countrywide

Financial and Countrywide Home Loans. At Sambol’s direction, Countrywide Financial and

Countrywide Home Loans greatly expanded their roles in the subprime mortgage business

despite warnings from employees that these loans were too risky. The subprime mortgage

market expansion is but one example of what everyone at Countrywide knew – if Sambol wanted

a change to any Countrywide program (whether at Countrywide Financial, Countrywide Home

Loans, Countrywide Securities, or any other Countrywide entity), then Sambol would be able to

effect the change because of his control and influence.

333. It was well known that Sambol was the highest-ranking person to involve when

any issues arose in getting loans approved. Account executives at Countrywide Home Loans

told their subordinates to take an underwriter’s decision not to approve the loan to Sambol to get

the deal done. Account executives and their subordinates recognized that Sambol had the power

to approve any risky loan deal at Countrywide Financial or Countrywide Home Loans.

334. Sambol threatened to fire subordinates unless they devised new ways for

Countrywide Financial and Countrywide Home Loans to make money, including by pushing

risky loan products. Sambol pressured employees to price risky loans in a way that would not

take into account the extent of the risk that the loans actually presented and would overstate the

value of the loans. Sambol also pressured employees to relax underwriting guidelines to enable

increased production of risky loans. Because of Sambol’s ability to control and influence

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Countrywide Financial and its subsidiaries (including Countrywide Securities and the Trusts),

employees solicited, approved, and issued the risky loans that Sambol wanted.

335. Through his ability to control and influence Countrywide Financial and its

subsidiaries (including Countrywide Securities and the Trusts), Sambol repeatedly crushed

dissenting voices within Countrywide regarding the ever-increasing risk Countrywide was taking

on in its mortgage programs. For example, when employees raised concerns regarding increases

in delinquencies, Sambol consistently pushed for risky loan products and downplayed or ignored

the expressed concerns. Sambol also used his control and influence to exclude individuals who

managed and oversaw the credit risk positions from the decision-making process. As a result of

Sambol’s actions, Countrywide Financial and Countrywide Home Loans continued their pursuit

of risky loan products from 2003 through 2008.

336. Sambol spearheaded the “lunge for growth” with respect to subprime mortgages

that were inherently risky. Sambol brushed aside warnings from risk-control managers that

underwriting standards were too lax, stating that being too cautious would turn Countrywide

Financial and its subsidiaries into a “nice, little boutique.” Sambol pushed a policy of offering

nearly the entire range of excessively risky mortgage products available in the market, including

100% financing, 80/20 loans, and low-doc and no-doc loans for borrowers with weak credit, and

through his control Sambol was able to implement this policy throughout Countrywide.

B. Bank of America’s Liability as a Successor-in-Interest by De Facto Merger

337. On January 11, 2008, Bank of America announced that it would purchase

Countrywide Financial for $4.1 billion.

338. On July 1, 2008, Bank of America completed its merger with Defendant

Countrywide Financial.

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339. Bank or America’s Form 10-Q for the period ending September 30, 2009,

reported that “On July 1, 2008, the Corporation [i.e. Bank of America] acquired Countrywide

through its merger with a subsidiary of the Corporation . . . . The acquisition of Countrywide

significantly expanded the Corporation’s mortgage originating and servicing capabilities, making

it a leading mortgage originator and servicer.” According to the 10-Q, “Countrywide’s results of

operations were included in the Corporation’s results beginning July 1, 2008.” The Form 10-Q

also acknowledged pending litigation against Countrywide.

340. On July 3, 2008, Countrywide Home Loans completed the sale of some or

substantially all of its assets to NB Holdings Corporation, a wholly-owned subsidiary of Bank of

America also used to effectuate the merger between Countrywide Financial and Bank of

America. NB Holdings Corporation is Countrywide Home Loans’ successor.

341. Countrywide Financial transferred substantially of its assets to Bank of America

on November 7, 2008. Around that time, Countrywide Financial ceased filing its own financial

statements, instead including its assets and liabilities on Bank of America’s financial statements.

342. On April 27, 2009, Bank of America rebranded Countrywide Home Loans as

“Bank of America Home Loans.” Many former Countrywide locations, employees, assets, and

business operations now continue under the Bank of America Home Loans brand. On the Form

10-K submitted by Bank of America on February 26, 2010, both Countrywide Capital Markets,

LLC and Countrywide Securities Corporation were listed as Bank of America subsidiaries.

343. Countrywide Financial’s former website now redirects to the Bank of America

website. Bank of America has assumed Countrywide Financial’s liabilities, having paid to

resolve other litigation arising from misconduct such as predatory lending allegedly committed

by Countrywide Financial.

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344. Thus Countrywide Financial and its subsidiaries, which include each of the

Countrywide Defendants, have now been merged into Bank of America. Bank of America is

liable for the wrongdoing of the Countrywide Defendants because it is the successor-in-interest

to each of the Countrywide Defendants.

345. Following its merger with Countrywide Financial, Bank of America took steps to

expressly and impliedly assume Countrywide Financial’s liabilities. Substantially all of

Countrywide Financial’s and Countrywide Home Loans’ assets were transferred to Bank of

America on November 7, 2008 “in connection with Countrywide’s integration with Bank of

America’s other businesses and operations,” along with certain of Countrywide’s debt securities

and related guarantees.” According to the Bank of America website, while the integration was

being completed “Countrywide customers . . . ha[d] access to Bank of America’s 6,100 banking

centers.”

346. As is customary in large corporate mergers, at least some of the Countrywide

Defendants retained their pre-merger corporate names following their merger with Bank of

America. However, Countrywide’s operations are becoming fully consolidated into Bank of

America’s and the Countrywide entities will soon lose (if they have not already) any independent

identity they have maintained following the merger. On April 27, 2009, Bank of America

announced in a press release that “[t]he Countrywide brand has been retired.” Bank of America

announced that it would operate its home loan and mortgage business through a new division

named Bank of America Home Loans, which “represents the combined operations of Bank of

America’s mortgage and home equity business and Countrywide Home Loans.”

347. The press release made clear that Bank of America plans to complete its

integration of Countrywide Financial into Bank of America “later this year.” The press release

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explained that Bank of America was in the process of rebranding former Countrywide “locations,

account statements, marketing materials and advertising” as Bank of America Home Loans, and

stated that “the full systems conversion” to Bank of America Home Loans would occur later in

2009. “Bank of America Home Loans” is thus a direct continuation of Countrywide’s

operations, although the Bank of America Defendants have represented that Bank of America

Home Loans is a “trade name” rather than a separate legal entity. It is a Bank of America trade

name or brand and thus a part of Bank of America.

348. As of September 21, 2009, former Countrywide bank deposit accounts were

reportedly converted to Bank of America accounts. And on November 9, 2009, online account

services for Countrywide mortgages were reportedly transferred to Bank of America’s Online

Banking website. According to press reports, Bank of America Home Loans will operate out of

Countrywide’s offices in Calabasas, California with substantially the same employees as the

former Countrywide entities.

349. Countrywide Financial ceased filing its own financial statements in November

2008, and its assets and liabilities have been included in Bank of America’s recent financial

statements. Bank of America has paid to restructure certain of Countrywide Financial’s home

loans on its behalf, including permitting Countrywide Financial and Countrywide Home Loans

to settle a predatory-lending lawsuit brought by state attorneys general and agree to modify up to

390,000 Countrywide loans, an agreement valued at up to $8.4 billion.

350. The Bank of America website announced that the companies merged and the

now-discontinued Countrywide website previously redirected inquiries about the merger to the

Bank of America webpage regarding the merger. Bank of America noted on its website that it

was “combining the valuable resources and extensive product lines of both companies.”

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351. Under the “Merger History” tab of Bank of America’s website, Countrywide is

included among the list of companies Bank of America has acquired. Under the “Time Line”

tab, the website states that Bank of America “became the largest consumer mortgage lender in

the country” following its acquisition of Countrywide in 2008. Lastly, under the “Our Heritage”

tab, the website states that the acquisition of Countrywide “resulted in the launch of Bank of

America Home Loans in 2009, making the bank the nation’s leading mortgage originator and

servicer.” The Countrywide logo appears on the page.

352. Mortgage contracts and legal documents state that BAC Home Loans Servicing,

LP is the entity “formerly known as” Countrywide Home Loans Servicing, a Countrywide

subsidiary, which clearly shows that BAC Home Loans Servicing, LP is the direct successor to

Countrywide Home Loans, since it is a mere continuation of Countrywide’s business.

353. Bank of America has described the transaction through which it acquired

Countrywide Financial and its subsidiaries as a merger and made clear that it intended to

integrate Countrywide Financial and its subsidiaries into Bank of America fully by the end of

2009.

354. For example, in a July 2008 Bank of America press release, Barbara Desoer,

identified as the head of the “combined mortgage, home equity and insurance businesses” of

Bank of America and Countrywide Financial, said: “Now we begin to combine the two

companies and prepare to introduce our new name and way of operating.” The press release

stated that the bank “anticipates substantial cost savings from combining the two companies.

Cost reductions will come from a range of sources, including the elimination of positions

announced last week, and the reduction of overlapping technology, vendor and marketing

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expenses. In addition, Countrywide is expected to benefit by leveraging its broad product set to

deepen relationships with existing Countrywide customers.”

355. Desoer was also interviewed for the May 2009 issue of Housing Wire magazine.

The article reported that:

While the move to shutter the Countrywide name is essentially complete, the operational effort to integrate across two completely distinct lending and service systems is just getting under way. One of the assets [Bank of America] acquired with Countrywide was a vast technology platform for originating and servicing loans, and Desoer says that the bank will be migrating some aspects of [Bank of America’s] mortgage operations over to Countrywide’s platforms.

356. Desoer was also quoted as saying: “We’re done with defining the target, and

we’re in the middle of doing the development work to prepare us to be able to do the conversion

of the part of the portfolio going to the legacy Countrywide platforms.” Desoer explained that

the conversion would happen in the “late fall” of 2009, and that the integration of the

Countrywide Financial and Bank of America platforms was a critical goal.

357. After the integration had further progressed, Desoer stated in the October 2009

issue of Mortgage Banking that “the first year is a good story in terms of the two companies

[coming] together and meeting all the major [goals and] milestones that we had set for ourselves

for how we would work to integrate the companies.” For Desoer, it was “the highlight of the

year . . . when we retired the Countrywide brand and launched the Bank of America Home Loans

brand.” In the same issue, Mary Kanaga, a Countrywide transition executive who helped

oversee integration, likened the process of integration to the completion of a mosaic:

“Everything [i.e., each business element] counts. Everything has to get there, whether it’s the

biggest project of the smallest project. It’s very much putting a puzzle together. If there is a

missing piece, we have a broken chain and we can’t complete the mosaic.”

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358. By way of another example, in its 2008 Annual Report, Bank of America

confirmed that “[o]n July 1, 2008, we acquired Countrywide,” and stated that the merger

“significantly improved our mortgage originating and servicing capabilities, making us a leading

mortgage originator and servicer.” In the Q&A section of the same report, the question was

posed: “How do the recent acquisitions of Countrywide and Merrill Lynch fit into your

strategy?” Bank of America responded that by acquiring Countrywide it became the “No. 1

provider of both mortgage originations and servicing” and “as a combined company,” it would

be recognized as a “responsible lender who is committed to helping our customers become

successful homeowners.” (Emphasis added). Similarly, in a July 1, 2008 Countrywide Financial

press release, Defendant Mozilo stated that “the combination of Countrywide and Bank of

America will create one of the most powerful mortgage franchises in the world.” (Emphasis

added).

359. In purchasing Countrywide Financial and its subsidiaries for 27% of its book

value, Bank of America was fully aware of the pending claims and potential claims against

Countrywide and factored them into the transaction. In an interview published on February 22,

2008 in the legal publication Corporate Counsel, a Bank of America spokesperson admitted that

Bank of America had assumed Countrywide’s liabilities:

Handling all this litigation won’t be cheap, even for Bank of America, the soon-to-be largest mortgage lender in the country. Nevertheless, the banking giant says that Countrywide’s legal expenses were not overlooked during negotiations. “We bought the company and all of its assets and liabilities,” spokesman Scott Silvestri says. “We are aware of the claims and potential claims against the company and have factored these into the purchase.”

(Emphasis added).

360. Moreover, on October 6, 2008, during an earnings call, Joe Price, Bank of

America’s Chief Financial Officer, stated that “As we transfer those operations [i.e.,

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Countrywide Financial and its subsidiaries] our company intends to assume the outstanding

Countrywide debt totaling approximately $21 billion.” Asked about the “formal guaranteeing”

of Countrywide’s debt, Kenneth D. Lewis, Bank of America’s former Chairman and Chief

Executive Officer, responded that “The normal process we followed is what are the operational

movements we’ll make to combine the operations. When we do that we’ve said the debt would

fall in line and quite frankly that’s kind of what we’ve said the whole time . . . . [T]hat’s been

very consistent with deals we’ve done in the past from this standpoint.” (Emphasis added).

361. Similarly, Lewis was quoted in a January 23, 2009 New York Times article

reporting on the acquisition of Countrywide Financial and its subsidiaries, in which he

acknowledged that Bank of America knew of the legal liabilities of Countrywide Financial and

its subsidiaries and impliedly accepted them as part of the cost of the acquisition:

We did extensive due diligence. We had 60 people inside the company for almost a month. It was the most extensive due diligence we have ever done. So we feel comfortable with the valuation. We looked at every aspect of the deal, from their assets to potential lawsuits and we think we have a price that is a good price.

(Emphasis added).

362. Bank of America has made additional statements showing that it has assumed the

liabilities of Countrywide. In a press release announcing the merger, Lewis stated that he was

aware of the “issues within the housing and mortgage industries” and said that “the transaction

[with Countrywide] reflects those challenges.” Despite these challenges, Lewis stated in October

2009 that “The Merrill Lynch and Countrywide integrations are on track and returning value

already.”

363. Likewise, in Bank of America’s Form 10-K for 2009, Bank of America

acknowledged that “[W]e face increased litigation risk and regulatory scrutiny as a result of the

Merrill Lynch and Countrywide acquisitions.”

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364. Brian Moynihan, Bank of America’s CEO and President, testified before the

Financial Crisis Inquiry Commission on January 13, 2010, that “our primary window into the

mortgage crisis came through the acquisition of Countrywide . . . . The Countrywide acquisition

has positioned the bank in the mortgage business on a scale it had not previously achieved.

There have been losses, and lawsuits, from the legacy of Countrywide operations, but we are

looking forward.”

365. Addressing investor demands for refunds on faulty loans sold by Countrywide,

Moynihan stated “There’s a lot of people out there with a lot of thoughts about how we should

solve this, but at the end of the day, we’ll pay for the things that Countrywide did.” And, in a

New York Times article published in December 2010, Moynihan, speaking about Countrywide,

stated that “Our company bought it and we’ll stand up; we’ll clean it up.”

366. Similarly, Jerry Dubrowski, a spokesman for Bank of America, was quoted in an

article published by Bloomberg in December 2010 that the bank will “act responsibly” and

repurchase loans in cases where there were valid defects with the loans. Through the third

quarter of 2010, Bank of America has faced $26.7 billion in repurchase requests and has

resolved, declined or rescinded $18 billion of those claims. It has established a reserve fund

against the remaining $8.7 billion in repurchase requests, which at the end of the third quarter

stood at $4.4 billion.

367. During an earnings call for the second quarter of 2010, Charles Noski, Bank of

America’s Chief Financial Officer, stated that “we increased our reps and warranties expense by

$722 million to $1.2 billion as a result of our continued evaluation of exposure to repurchases

including our exposure to repurchase demands from certain monoline insurers.” And during the

earnings call for the third quarter of 2010, Noski stated that “[t]hrough September, we’ve

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received $4.8 billion of reps and warranties claims related to the monoline-insured deals, of

which $4.2 billion remains outstanding, and approximately $550 million were repurchased.”

368. Bank of America has reached various settlement agreements in which it has

directly taken responsibility for Countrywide’s liabilities. As part of a settlement agreement with

certain state attorneys general, Bank of America agreed to forgive up to 30 percent of the

outstanding mortgage balances owed by former Countrywide customers. The loans were made

before Bank of America acquired Countrywide.

369. In October 2010, the New York Times reported that Bank of America is “on the

hook” for $20 million of the disgorgement that Defendant Mozilo agreed to pay in his settlement

agreement with the SEC. The agreement and plan of merger between Bank of America and

Countrywide provided that all indemnification provisions “shall survive the merger and shall

continue in full force and effect . . . for a period of six years.” According to the article, “Because

Countrywide would have had to pay Mr. Mozilo’s disgorgement, Bank of America took on the

same obligation, even though it had nothing to do with the company’s operations at the time.”

370. Still, Bank of America has generated substantial earnings from the absorption of

Countrywide’s mortgage business. For example, a Bank of America press release regarding the

company’s 2009 first quarter earnings stated that “[n]et revenue nearly quadrupled to $5.2 billion

primarily due to the acquisition of Countrywide and from higher mortgage banking income as

lower interest rates drove an increase in mortgage activity.” Lewis was quoted as saying, “We

are especially gratified that our new teammates at Countrywide and Merrill Lynch had

outstanding performance that contributed significantly to our success.”

371. A press release regarding Bank of America’s 2009 second quarter earnings

similarly stated that “[n]et revenue rose mainly due to the acquisition of Countrywide and higher

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mortgage banking income as lower interest rates spurred an increase in refinance activity.” The

press release explained that “higher mortgage banking income, trading account profits and

investment and brokerage services income reflected the addition of Merrill Lynch and

Countrywide.” Bank of America reported that its average retail deposits in the quarter increased

$136.3 billion, or 26 percent, from a year earlier, including $104.3 billion in balances from

Merrill Lynch and Countrywide.

372. Bank of America’s 2009 annual report stated that “[r]evenue, net of interest

expense on a fully taxable-equivalent (FTE) basis, rose to $120.9 billion, representing a 63%

increase from $74.0 billion in 2008, reflecting in part the addition of Merrill Lynch and the full-

year impact of Countrywide.” Bank of America also reported that “[m]ortgage banking income

increased $4.7 billion driven by higher production and servicing income . . . primarily due to

increased volume as a result of the full-year impact of Countrywide . . . .” Insurance income also

increased $927 million “due to the full-year impact of Countrywide’s property and casualty

businesses.”

373. Based on the above, Bank of America has “de facto” merged with Countrywide

Financial, consolidating and merging with the Countrywide Defendants and acquiring

substantially all of the assets of all the Countrywide Defendants. Bank of America is, thus, the

successor in liability to Countrywide and is jointly and severally liable for the wrongful conduct

alleged herein of the Countrywide Defendants.

374. Based on the same facts, the Supreme Court of the State of New York in MBIA

Ins. Corp. v. Countrywide Home Loans, et al., Index No. 602825/08, held that MBIA sufficiently

alleged a de facto merger “in which Bank of America intended to absorb and continue the

operation of Countrywide.” Id., Order on Motion to Dismiss at 15 (Apr. 29, 2010).

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C. Allstate’s 1933 Act Claims Have Been Tolled By Previously-Filed Class Action Complaints

375. On November 14, 2007, a class action was filed against various Countrywide

entities, former officers, and underwriters on behalf of all investors who purchased or otherwise

acquired certain mortgage-backed securities that were issued, underwritten or sold by

Countrywide. See Luther v. Countrywide Home Loans Servicing LP, BC380698 (Cal. Super. Ct.

2007). The Luther complaint alleges claims under Sections 11, 12(a)(2), and 15 of the Securities

Act of 1933.

376. Among the Offerings that Allstate invested in, the following were included in the

November 2007 Luther class action: CWALT 2005-25T1, CWALT 2006-30T1, CWALT 2006-

45T1, CWALT 2006-9T1, and CWALT 2006-J1. Allstate was expressly stated to be part of the

defined class in Luther, as of November 14, 2007, with respect to these Offerings.

377. On June 12, 2008, a different securities class action was filed against

Countrywide in California state court, Washington State Plumbing & Pipefitting Pension Trust v.

Countrywide Financial Corp., BC392571 (Cal. Super. Ct. 2008). Like Luther, this action also

alleged Section 11, 12(a)(2), and 15 claims against Countrywide, its former officers, and

underwriters, although Washington State Plumbing based its claims on different securitizations

than those in Luther.

378. Among the Offerings that Allstate invested in, the following were included in the

June 12, 2008 Washington State Plumbing class action: CWALT 2007-18CB, CWALT 2007-

20, CWHL 2005-HYB7, CWHL 2006-9, CWL 2005-11, CWL 2005-13, CWL 2005-16, CWL

2005-17, CWL 2006-1, CWL 2006-9, CWL 2006-S1, CWL 2006-S2, CWL 2006-S5, CWL

2007-4, CWL 2007-S1, and CWL 2007-S2. As in Luther, Allstate was expressly stated to be

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part of the defined class in Washington State Plumbing, as of June 12, 2008, with respect to these

Offerings.

379. On September 9, 2008, the Luther complaint was amended to add the

securitizations from Washington State Plumbing to the Luther class. The Washington State

Plumbing action was consolidated with the original Luther action, and a consolidated and

amended complaint was filed on October 16, 2008. Allstate was included in the defined class in

the Luther/Washington State Plumbing consolidated complaint with respect to investments in the

following Offerings: CWALT 2005-25T1, CWALT 2006-30T1, CWALT 2006-45T1, CWALT

2006-9T1, CWALT 2006-J1, CWALT 2007-18CB, CWALT 2007-20, CWHL 2005-HYB7,

CWHL 2006-9, CWL 2005-11, CWL 2005-13, CWL 2005-16, CWL 2005-17, CWL 2006-1,

CWL 2006-9, CWL 2006-S1, CWL 2006-S2, CWL 2006-S5, CWL 2006-S8, CWL 2007-4,

CWL 2007-S1, and CWL 2007-S2.

380. The consolidated Luther action was subsequently dismissed on jurisdictional

grounds in January 2010 and refiled that month as Maine State Retirement System v.

Countrywide Financial Corp., No. 10 Civ. 0302 (C.D. Cal. 2010). Allstate was included in the

defined class in the Maine State complaint with respect to investments in the following

Offerings, the same Offerings in the Luther/Washington State Plumbing consolidated complaint:

CWALT 2005-25T1, CWALT 2006-30T1, CWALT 2006-45T1, CWALT 2006-9T1, CWALT

2006-J1, CWALT 2007-18CB, CWALT 2007-20, CWHL 2005-HYB7, CWHL 2006-9, CWL

2005-11, CWL 2005-13, CWL 2005-16, CWL 2005-17, CWL 2006-1, CWL 2006-9, CWL

2006-S1, CWL 2006-S2, CWL 2006-S5, CWL 2006-S8, CWL 2007-4, CWL 2007-S1, and

CWL 2007-S2.

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381. In a November 4, 2010 decision, the Maine State court held that the named

plaintiffs in the class action had standing to sue Countrywide only with respect to 81 of the

offerings in which the named plaintiffs themselves invested. Maine State Retirement System v.

Countrywide Financial Corp., No. 10 Civ. 0302 (C.D. Cal. Nov. 4, 2010) (opinion), at 7. The

court rejected the notion that the plaintiffs could represent class members who bought in other

Countrywide offerings, even if the offerings emanated from a common registration statement.

The net effect of the court’s ruling is to narrow the Maine State class and to exclude class

members whose investments in Countrywide mortgage-backed securities do not overlap with

those of the named plaintiffs. Id. at 5-8.

382. Some of Allstate’s investments were made in the same Offerings as the named

plaintiffs in the Luther, Washington State Plumbing, and Maine State. These Offerings include

CWABS 2005-11, CWABS 2006-9, and CWHEQ 2006-S2.

383. However, certain other of Allstate’s Countrywide investments appear not to

overlap with the investments of the named plaintiffs (though Allstate cannot be certain of this

because the Luther complaint does not list the individual purchases of plaintiff David Luther).

Nonetheless, it appears that the Court’s standing ruling may have the effect of involuntarily

excluding Allstate from the Countrywide mortgage-backed-securities class action, at least with

respect to certain of its investments.

384. Because of the uncertainty arising from this ruling, Allstate has chosen to file this

separate action and to assert its 1933 Act claims and other claims, which have been tolled by the

pendency of the various Countrywide RMBS class actions. Allstate has been part of the putative

class in all of the Countrywide class actions, from Luther to Washington State Plumbing to

Maine State. Allstate reasonably and justifiably relied on the named plaintiffs in these class

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actions to protect its rights and it reasonably and justifiably relied on the class action tolling

doctrines of American Pipe and WorldCom to toll the statute of limitations on its 1933 Act

claims.

385. Under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), all

putative class members are treated as if they filed their own individual actions until they either

opt out or until a certification decision excludes them. Id. at 255. As the Second Circuit stated

in In re WorldCom Securities Litigation, 496 F.3d 245, 255 (2d Cir. 2007): “[B]ecause

Appellants were members of a class asserted in a class action complaint, their limitations period

was tolled under the doctrine of American Pipe until such time as they ceased to be members of

the asserted class, notwithstanding that they also filed individual actions prior to the class

certification decision.” WorldCom, 496 F.3d at 256.

386. Allstate was a member of the putative class “asserted” in Luther and subsequent

class actions and its 1933 Act claims are therefore timely pursuant to American Pipe and In re

WorldCom.

387. Except for the Bank of America Defendants, Mozilo, and Countrywide Capital

Markets, each Defendant in this Complaint was also a defendant in the Luther or Washington

State Plumbing class actions, for the same causes of action asserted herein.

FIRST CAUSE OF ACTION (Violation of Section 10(b) and Rule 10b-5)

388. Allstate realleges each allegation above as if fully set forth herein.

389. This claim is brought under Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b) and

Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. § 240.10b-5, against Countrywide

Home Loans, Countrywide Securities, the Depositors, and the Bank of America Defendants as

Countrywide’s successors (the “Section 10(b) Defendants”). The Section 10(b) Defendants (a)

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employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact

and/or omitted material facts necessary to make the statements made not misleading; and (c)

engaged in acts, practices, and a course of business which operated as a fraud and deceit upon

Allstate, in violation of Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder.

390. The Section 10(b) Defendants, individually and in concert, directly and indirectly,

by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and

participated in a continuous course of conduct to conceal non-public, adverse material

information about the Securitizations from Allstate, as reflected in the misrepresentations and

omissions set forth above in Sections III and IV above and in Exhibits F through DD.

391. The Section 10(b) Defendants each had actual knowledge of the

misrepresentations and omissions of material facts set forth herein, or acted with reckless

disregard for the truth by failing to ascertain and to disclose such facts even though such facts

were available to them, or deliberately refrained from taking steps necessary to discover whether

the material facts were false or misleading.

392. As a result of the Section 10(b) Defendants’ dissemination of materially false and

misleading information and their failure to disclose material facts, Allstate was misled into

believing that the Certificates were more creditworthy investments than they actually were.

393. Allstate purchased the Certificates without knowing that the Section 10(b)

Defendants had misstated or omitted material facts about the Securitizations. In purchasing the

Certificates, Allstate relied directly or indirectly on false and misleading statements made by the

Section 10(b) Defendants, and/or an absence of material adverse information that was known to

the Section 10(b) Defendants or recklessly disregarded by them but not disclosed in

Countrywide’s public statements or its communications with Allstate. Allstate was damaged as a

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result of their reliance on the Section 10(b) Defendants’ false statements and misrepresentations

and omissions of material facts.

394. At the time of the Section 10(b) Defendants’ false statements, misrepresentations

and omissions, Allstate was ignorant of their falsity and believed them to be true. Allstate would

not have purchased or otherwise acquired the Certificates had it known the truth about the

matters discussed above.

395. Allstate is filing this action within two years after discovery of the facts

constituting the violation, including facts establishing scienter and other elements of Allstate’s

claim, and within 5 years after the violations with respect to most of Allstate’s investments.

396. By virtue of the foregoing, the Section 10(b) Defendants have violated §10(b) of

the 1934 Act and Rule 10b-5 promulgated thereunder.

397. As a direct and proximate result of the Section 10(b) Defendants’ wrongful

conduct, Allstate has suffered damages in connection with the purchase and subsequent decline

in value of the Certificates, and in connection with the subsequent sale of certain Certificates for

a loss.

SECOND CAUSE OF ACTION (Violation of Section 20(a) of the 1934 Act))

398. Allstate realleges each allegation above as if fully set forth herein.

399. Each of the Section 10(b) Defendants is liable as a direct participant and primary

violator with respect to the wrongdoing discussed herein. Countrywide Financial, Mozilo and

Sambol (the “Section 20(a) Defendants”), by reason of their status as parent company and senior

executive officers and directors of Countrywide, directly or indirectly controlled the conduct of

Countrywide’s business and its representations to Allstate, within the meaning of § 20(a) of the

1934 Act. The Section 20(a) Defendants directly or indirectly controlled the content of the

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Offering Materials related to Allstate’s investments in the Securities within the meaning of §

20(a) of the 1934 Act. Therefore the Section 20(a) Defendants are jointly and severally liable for

Countrywide’s fraud, as alleged herein.

400. The Section 20(a) Defendants controlled and had the authority to control the

content of certain of Countrywide’s documents, including the Certificates’ Offering Materials.

Because of their close involvement in the everyday activities of the Company, and because of

their wide-ranging supervisory authority, the Section 20(a) Defendants reviewed or had the

opportunity to review those documents prior to their issuance and therefore knew or should have

known that those documents contained misrepresentations. The Section 20(a) Defendants

reviewed or could have reviewed these documents prior to their issuance, or could have

prevented their issuance or caused them to be corrected.

401. The Section 20(a) Defendants knew or recklessly disregarded the fact that

Countrywide’s representations were materially false and misleading and/or omitted material facts

when made. In so doing, the Section 20(a) Defendants did not act in good faith.

402. By virtue of their high-level positions and their participation in and awareness of

Countrywide’s operations and public statements, the Section 20(a) Defendants were able to and

did influence and control Countrywide’s decision-making, including controlling the content and

dissemination of the documents that Plaintiffs contend contained materially false and misleading

information and on which Plaintiffs relied.

403. The Section 20(a) Defendants had the power to control or influence the particular

transactions giving rise to the securities violations alleged herein, as set forth more fully in

Section VII(A) above.

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404. As set forth above, the Section 10(b) Defendants each violated § 10(b) of the

1934 Act and Rule 10b-5, thereunder, by their acts and omissions as alleged herein. By virtue of

their positions as controlling persons, the Section 20(a) Defendants are also liable pursuant to §

20(a) of the 1934 Act.

405. As a direct and proximate result of Defendants’ wrongful conduct, including the

wrongful conduct of Countrywide Financial, Mozilo and Sambol, Allstate suffered damages in

connection with its purchase of mortgage-backed securities from Countrywide.

THIRD CAUSE OF ACTION (Common-law Fraud)

406. Allstate realleges each allegation above as if fully set forth herein.

407. This claim is brought against Countrywide Financial, Countrywide Home Loans,

Countrywide Securities, the Depositors (the “Common-Law Fraud Defendants”), and the Bank

of America Defendants as Countrywide’s successor.

408. The material representations set forth above were fraudulent, and the Common-

Law Fraud Defendants’ representations fraudulently omitted material statements of fact. The

representations at issue are identified above and in the Exhibits, and are summarized in Section

III above.

409. Each of the Common-Law Fraud Defendants knew their representations and

omissions were false and/or misleading at the time they were made. Each of the Common-Law

Fraud Defendants made the misleading statements with an intent to defraud Allstate.

410. Allstate justifiably relied on the Common-Law Fraud Defendants’ false

representations and misleading omissions.

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411. Had Allstate known the true facts regarding the Common-Law Fraud Defendants’

underwriting practices and quality of the loans making up the securitizations, it would not have

purchased the Certificates.

412. As a result of the Common-Law Fraud Defendants’ false and misleading

statements and omissions, as alleged herein, Allstate has suffered damages according to proof.

The Countrywide Defendants are liable to Allstate for common-law fraud, and the Bank of

America Defendants are liable as their successors.

FOURTH CAUSE OF ACTION (Aiding and Abetting Common-Law Fraud)

413. Allstate realleges each allegation above as if fully set forth herein.

414. This is a claim for aiding and abetting fraud brought against Countrywide

Financial, Countrywide Capital Markets, Mozilo, Sambol, and the Bank of America Defendants

as Countrywide’s successor (together “the Aiding and Abetting Defendants”).

415. The Aiding and Abetting Defendants knew that the Certificates being packaged

and sold by Countrywide were not backed by high-quality loans and were not underwritten

according to Countrywide’s stated underwriting guidelines. The Countrywide Defendants,

Mozilo, and Sambol knew that due diligence on the securitizations was not being done and/or

was not being done properly.

416. The Aiding and Abetting Defendants gave substantial assistance to and/or

facilitated and encouraged the Depositors, Countrywide Securities, and Countrywide Home

Loans in their fraud as set forth in Section VII(A) and elsewhere above. In providing substantial

assistance, the Aiding and Abetting Defendants knew that the information being distributed to

the public was false and misleading, and that material information was being withheld, but

intended to facilitate the wrongful conduct.

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417. As a result of the foregoing, Allstate has suffered damages according to proof.

FIFTH CAUSE OF ACTION (Negligent Misrepresentation)

418. Allstate realleges each allegation above as if fully set forth herein.

419. This is a claim for negligent misrepresentation against the Depositors,

Countrywide Securities, Countrywide Home Loans, and Countrywide Financial (the “Negligent

Misrepresentation Defendants”).

420. Allstate made 67 separate investments in 29 Offerings of mortgage-backed

securities that the Countrywide Defendants securitized and sold. The Negligent

Misrepresentation Defendants also originated or acquired, underwrote, and serviced all the loans

in the Offerings. Mozilo and Sambol were closely involved in the everyday management of the

Negligent Misrepresentation Defendants.

421. Because Countrywide arranged the Securitizations, and originated or acquired,

underwrote, and serviced all of the underlying mortgage loans, it had unique and special

knowledge about the loans in the Offerings. In particular, Countrywide had unique and special

knowledge and expertise regarding the quality of the underwriting of those loans as well as the

servicing practices employed as to such loans.

422. Because Allstate could not evaluate the loan files for the Mortgage Loans

underlying its Certificates, and because Allstate could not examine the underwriting quality or

servicing practices for the Mortgage Loans in the Securitizations on a loan-by-loan basis, it was

heavily reliant on Countrywide’s unique and special knowledge regarding the underlying

mortgage loans when determining whether to make each investment of Certificates. Allstate was

entirely reliant on Countrywide to provide accurate information regarding the loans in engaging

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in that analysis. Accordingly, Countrywide was uniquely situated to evaluate the economics of

each Securitization.

423. Over the course of more than three years, for 67 separate investments, Allstate

relied on Countrywide’s unique and special knowledge regarding the quality of the underlying

Mortgage Loans and their underwriting when determining whether to invest in the Offerings.

This longstanding relationship, coupled with Countrywide’s unique and special knowledge about

the underlying loans, created a special relationship of trust, confidence, and dependence between

Countrywide and Allstate.

424. Countrywide was aware that Allstate relied on Countrywide’s unique and special

expertise and experience and depended upon Countrywide for accurate and truthful information.

Countrywide also knew that the facts regarding Countrywide’s compliance with its underwriting

standards were exclusively within its knowledge.

425. Based on its expertise, superior knowledge, and relationship with Allstate,

Countrywide owed a duty to Allstate to provide complete, accurate, and timely information

regarding the Mortgage Loans and the Offerings. The Negligent Misrepresentation Defendants

breached their duty to provide such information to Allstate.

426. The Negligent Misrepresentation Defendants likewise made misrepresentations

which they knew, or were negligent in not knowing at the time to be false, in order to induce

Allstate’s investment in the Offerings. The misrepresentations are set forth in Section III above

and in Exhibits F through DD. At the time they made these misrepresentations, the Negligent

Misrepresentation Defendants knew, or at a minimum were negligent in not knowing, that these

statements were false, misleading, and incorrect. Such information was known to the Negligent

Misrepresentation Defendants but not known or readily known to Allstate, and the Negligent

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Misrepresentation Defendants knew that Allstate was acting in reliance on mistaken

information.

427. Allstate reasonably relied on the information the Negligent Misrepresentation

Defendants did provide and was damaged as a result of these misrepresentations. Had Allstate

known the true facts regarding Countrywide’s underwriting practices and the quality of the loans

making up the securitizations, it would not have purchased the Certificates.

428. The Negligent Misrepresentation Defendants’ material misrepresentations and

omissions set forth above were made without any reasonable ground for believing that the

representations were true.

429. By reason of the foregoing, the Negligent Misrepresentation Defendants are

liable to Allstate for negligent misrepresentation.

SIXTH CAUSE OF ACTION (Violation of Section 11 of the 1933 Act) )

430. Allstate realleges each allegation above as if fully set forth herein, except to the

extent that Allstate expressly excludes from this cause of action any allegation that could be

construed as alleging fraud or intentional or reckless conduct. This cause of action specifically

excludes the allegations as to Defendants’ scienter set forth in Sections IV and V.

431. This cause of action is based solely on claims of strict liability or negligence

under the 1933 Act. This count is predicated upon the Section 11 Defendants’ strict liability for

making untrue and materially misleading statements in the Offering Materials for the Section 11

Investments identified in Exhibits F through DD.

432. This claim is brought under Section 11 of the 1933 Act, 15 U.S.C. §77k (“Section

11”), against Countrywide Securities, the Depositors, and the Signatories (David Sambol, Eric

Sieracki, Ranjit Kripalani, Stanford Kurland, David A. Spector, N. Joshua Adler, and Jennifer

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Sandefur) (all together, the “Section 11 Defendants”) arising from Allstate’s purchases of the

Certificates.

433. Each of Allstate’s purchases of the Certificates was made pursuant to the false

and misleading Offering Materials, including the Registration Statements.

434. The Offering Materials for the Offerings were materially untrue, misleading,

contained untrue statements of material facts, and omitted to state material facts required to be

stated therein or necessary to make the statements therein not misleading. At the time it obtained

the Certificates, Allstate did not know of the facts concerning the untrue and misleading

statements and omissions alleged herein.

435. The materially untrue statements and omissions of material fact in the Offering

Materials are set forth in Section III above and in Exhibits F through DD.

436. The Section 11 Defendants caused to be issued and disseminated, directed other

parties to disseminate at the time of the filing of the Offering Materials, and/or participated in the

issuance and dissemination to Allstate of materially untrue statements of facts and omissions of

material facts, which were contained in the Offering Materials.

437. The Section 11 Defendants are strictly liable to Allstate for the materially untrue

statements and omissions in the Offering Materials under Section 11. The Depositors are liable

as issuers of the Certificates, in particular, within the meaning of Section 2(a)(4) of the 1933 Act,

15 U.S.C. §77b(a)(4), and in accordance with Section 11(a) of the 1933 Act, 15 U.S.C. §77k(a).

Countrywide Financial is liable as an issuer, among other grounds, because it formed the

Depositors as a limited purpose finance subsidiaries for the purpose of issuing the Certificates

and subsequently issued the Certificates via the Depositors.

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438. Defendant Countrywide Securities is liable for its role as the lead underwriter of

both Securitizations, in accordance with Section 11(a)(5) of the 1933 Act, 15 U.S.C. §77k(a)(5).

439. The Signatories are liable for signing the Registration Statements, in accordance

with Section 11(a)(1) of the 1933 Act, 15 U.S.C. §77k(a)(1).

440. The Section 11 Defendants owed to Allstate a duty to make a reasonable and

diligent investigation of the statements contained in the Offering Materials at the time they

became effective to ensure that such statements were true and correct and that there was no

omission of material facts required to be stated in order to make the statements contained therein

not misleading. The Section 11 Defendants failed to exercise such due diligence by failing to

conduct a reasonable investigation.

441. This action is brought within one year of the discovery of the materially untrue

statements and omissions in the Offering Materials and brought within three years of the

effective date of the Offering Materials, by virtue of the timely filing of the Luther, Washington

State Plumbing, and Maine State complaints and by the tolling of Allstate’s claims afforded by

those filings.

442. Allstate has sustained damages measured by the difference between the price

Allstate paid for the certificates and (1) the value of the Certificates at the time this suit is

brought, or (2) the price at which Allstate sold the Certificates in the market prior to the time suit

is brought. Allstate’s Certificates lost substantial market value subsequent to and due to the

materially untrue statements of facts and omissions of material facts in the Offering Materials

alleged herein.

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443. By reason of the conduct herein alleged, the Section 11 Defendants violated

Section 11 of the 1933 Act and are jointly and severally liable for their wrongdoing. By virtue of

the foregoing, Allstate is entitled to damages from each of the Section 11 Defendants.

SEVENTH CAUSE OF ACTION (Violation of Section 12(a)(2) of the 1933 Act)

444. Allstate realleges each allegation above as if fully set forth herein, except to the

extent that Allstate expressly excludes from this cause of action any allegation that could be

construed as alleging fraud or intentional or reckless conduct. This cause of action specifically

excludes the allegations as to Defendants’ scienter set forth in Sections IV and V.

445. This cause of action is based solely on claims of strict liability or negligence

under the 1933 Act.

446. This count is predicated upon Defendants’ negligence for making untrue and

materially misleading statements in the Offering Materials for the following Offerings that

Allstate invested in (identified by the name of the Offering and the class):

447. CWALT 2004-7T1, A4; CWL 2004-7, MF2; CWHEL 2004-I, A; CWHEL 2005-

B, 2A; CWL 2005-1, MF2; CWL 2005-1, MF3; CWL 2005-1, MF4; CWL 2005-1, MF5; CWL

2005-3, MF2; CWL 2005-3, MF3; CWL 2005-3, MF4; CWL 2005-3, MF5; CWL 2005-11,

AF5A; CWL 2005-11, AF6; CWL 2005-13, AF5; CWL 2005-13, AF6; CWL 2005-16, 2AF2;

CWL 2005-16, 2AF5; CWL 2005-17, 1AF2; CWL 2005-17, 1AF5; CWL 2006-1, AF5; CWL

2006-1, AF6; CWALT 2006-J1, 1A6; CWL 2006-S1, A2; CWL 2006-S2, A2; CWHL 2005-

HYB7, 3A2; CWL 2006-S5, A3; CWL 2006-S5, A4; CWL 2006-S8, A3; CWL 2006-S8, A6;

CWL 2007-S1, A3; CWL 2007-S1, A4; CWL 2007-S1, A6; CWL 2007-4, M1; CWL 2007-4,

M2; CWL 2007-S2, A6; and CWL 2005-17, 1AF5.

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448. This is a claim brought under Section 12(a)(2) of the 1933 Act, 15 U.S.C.

§77l(a)(2) (“Section 12(a)(2)”), against Countrywide Securities, the Depositors, and the Bank of

America Defendants as the Countrywide Defendant’s successor (collectively the “Section

12(a)(2) Defendants”) arising from Allstate’s purchases of the Certificates.

449. The Section 12(a)(2) Defendants offered and sold the Certificates to Allstate by

means of the defective Offering Materials, including the Prospectuses and Prospectus

Supplements, which contained materially untrue statements of facts and omitted to state material

facts necessary to make the statements, in the light of the circumstances under which they were

made, not misleading. Allstate purchased the Certificates directly from the Section 12(a)(2)

Defendants, who both transferred title to Allstate and who solicited Allstate for financial gain.

450. The materially untrue statements of facts and omissions of material fact in the

Offering Materials are set forth in Section III above and in the Exhibits.

451. The Section 12(a)(2) Defendants offered the Certificates for sale, sold them, and

distributed them by the use of means or instruments of transportation and communication in

interstate commerce.

452. The Section 12(a)(2) Defendants owed to Allstate the duty to make a reasonable

and diligent investigation of the statements contained in the Offering Materials, to ensure that

such statements were true, and to ensure that there was no omission to state a material fact

required to be stated in order to make the statements contained therein not misleading. The

Section 12(a)(2) Defendants failed to exercise such reasonable care.

453. The Section 12(a)(2) Defendants knew, or in the exercise of reasonable care

should have known, that the Offering Materials contained materially untrue statements of facts

and omissions of material facts, as set forth above, at the time of the Offerings. Conversely,

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Allstate did not know, nor in the exercise of reasonable diligence could it have known, of the

untruths and omissions contained in the Offering Materials at the time it purchased the

Certificates.

454. This action is brought within one year of the time when Allstate discovered or

reasonably could have discovered the facts upon which this action is based, and within three

years of the time that the Certificates upon which this cause of action is brought were sold to the

public, by virtue of the timely filing of the Luther, Washington State Plumbing, and Maine State

complaints and by the tolling of Allstate’s claims afforded by those filings.

455. Allstate sustained material damages in connection with its investments in the

Securitizations and accordingly have the right to rescind and recover the consideration paid for

the Certificates, with interest thereon, in exchange for tendering the Certificates. Allstate hereby

tenders its Certificates and demands rescission.

EIGHTH CAUSE OF ACTION (Violation of Section 15 of the 1933 Act)

456. Allstate realleges each allegation above as if fully set forth herein.

457. This is a claim brought under Section 15 of the 1933 Act, 15 U.S.C. §77o

(“Section 15”), against Countrywide Financial, Countrywide Home Loans, Countrywide Capital

Markets, Sambol, and against the Bank of America Defendants as Countrywide Financial’s

successor (the “Section 15 Defendants”) for controlling-person liability with regard to the

Section 11 and Section 12(a)(2) causes of actions set forth above. The Section 15 Defendants

were named as defendants in the Third Cause of Action in Luther, for “Violation of Section 15 of

the Securities Act Against Countrywide Financial, Countrywide Securities, Countrywide Capital

Markets and Countrywide Home Loans.”

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458. The Section 15 Defendants are controlling persons within the meaning of Section

15 by virtue of their actual power over, control of, ownership of, and/or directorship of the

Section 11 Defendants and the Section 12(a)(2) Defendants, defined above, at the time of the

wrongs alleged herein and as set forth herein, including their control over the content of the

Offering Materials.

459. The Section 11 and 12(a)(2) Defendants acted negligently and without reasonable

care regarding the accuracy of the information contained in and incorporated by reference in the

Offering Materials. The Section 11 and 12(a)(2) Defendants lacked reasonable grounds to

believe that such information was accurate and complete in all material respects.

460. For the reasons set forth in Section VII(A) above, the Section 15 Defendants had

power and influence over the Section 11 and 12(a)(2) Defendants and exercised the same to

cause those Defendants to engage in the acts described herein. By virtue of their control,

ownership, offices, directorship and specific acts, the Section 15 Defendants each had the power

to influence and control, and did influence and control, directly or indirectly, the decision-

making of the Section 11 and 12(a)(2) Defendants named herein, including controlling the

content of the Offering Materials.

461. The Section 15 Defendants’ control, ownership, and position made them privy to

and provided them with actual knowledge of the material facts concealed from Allstate.

462. Neither of the Defendants named herein conducted a reasonable investigation or

possessed reasonable grounds for the belief that the statements contained in the Offering

Materials were true, were without omissions of any material fact, or were not misleading.

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463. Allstate did not know, nor in the exercise of reasonable diligence could it have

known, of the untruths and omissions contained in the Offering Materials at the time it purchased

the Certificates.

464. By virtue of the conduct alleged herein, the Section 15 Defendants are liable for

the aforesaid wrongful conduct, jointly and severally with – and to the same extent as – the

entities they controlled for the violations of Sections 11 and 12(a)(2) by the controlled entities.

NINTH CAUSE OF ACTION (Successor and Vicarious Liability)

465. Allstate realleges each allegation above as if fully set forth herein.

466. The Bank of America Defendants are liable for Countrywide’s wrongdoing, in its

entirety, under common law, because Bank of America and Countrywide merged or

consolidated, because Bank of America has expressly or impliedly assumed Countrywide’s tort

liabilities, and because the Bank of America Defendants are a mere continuation of the

Countrywide Defendants.

PRAYER FOR RELIEF

WHEREFORE Allstate prays for relief as follows:

An award of damages against Defendants in favor of Allstate against all Defendants,

jointly and severally, for all damages sustained as a result of Defendants’ wrongdoing, in an

amount to be proven at trial, but including at a minimum:

a. Rescission and recovery of the consideration paid for the Certificates, with

interest thereon, pursuant to Allstate’s Section 12(a)(2) claim;

b. Allstate’s monetary losses, including loss of market value and loss of principal

and interest payments, on all other claims besides Allstate’s Section 12(a)(2) claim;

c. Attorneys’ fees and costs;

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